|Item 17 &Uml; Item 18 &Uml;|
|Item 1.Identity of Directors, Senior Management and Advisers|
|Item 2.Offer Statistics and Expected Timetable|
|Item 3.Key Information|
|Item 4.Information on The Company|
|Item 4A.Unresolved Staff Comments|
|Item 5.Operating and Financial Review and Prospects|
|Item 6.Directors, Senior Management and Employees|
|Item 7.Major Shareholders and Related Party Transactions|
|Item 8.Financial Information|
|Item 9.The Offer and Listing|
|Item 10.Additional Information|
|Item 11.Quantitative and Qualitative Disclosure About Market Risk.|
|Item 12.Description of Securities Other Than Equity Securities.|
|Item 13.Defaults, Dividend Arrearages and Delinquencies.|
|Item 14.Material Modifications To The Rights of Security Holders and Use of Proceeds.|
|Item 15.Controls and Procedures|
|Item 16A.Audit Committee Financial Expert.|
|Item 16B.Code of Ethics.|
|Item 16C.Principal Accountant Fees and Services.|
|Item 16D.Exemptions From The Listing Standards for Audit Committees|
|Item 16E.Purchase of Equity Securities By The Issuer and Affiliated Purchasers|
|Item 16F.Change in Registrant's Certifying Accountant.|
|Item 16G.Corporate Governance.|
|Item 16H.Mine Safety Disclosure.|
|Item 17.Financial Statements.|
|Item 18.Financial Statements.|
|Note 2:Significant Accounting Policies|
|Note 3:Marketable Securities|
|Note 4:Other Long-Term Assets|
|Note 5:Property and Equipment, Net|
|Note 6:Capitalized Software Development Costs, Net|
|Note 7:Other Intangible Assets, Net|
|Note 9:Accrued Expenses and Other Liabilities|
|Note 10:Commitments and Contingent Liabilities|
|Note 11:Taxes on Income|
|Note 13:Related Parties Transactions|
|Note 14:Basic and Diluted Net Earnings per Share|
|Note 15:Geographic Information|
|Note 16:Selected Statements of Operations Data|
|Note 17:Subsequent Events|
|Balance Sheet||Income Statement||Cash Flow|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|¨||REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934|
|x||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2016
|¨||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the transition period from ____________ to _______________
|¨||SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
Date of event requiring this shell company report. . . . . . . . . . .
Commission file number 000-20181
SAPIENS INTERNATIONAL CORPORATION N.V.
(Exact name of Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
26 Harukmim St.
Holon, 5885800 Israel
(Address of principal executive offices)
Roni Giladi, Chief Financial Officer
26 Harukmim St.
Holon, 5885800 Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|Title of Class:||Name of each exchange on which registered:|
|Common Shares, par value € 0.01 per share||NASDAQ Capital Market|
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report
As of December 31, 2016, the issuer had 49,035,951 Common Shares, par value € 0.01 per share, outstanding (which excludes 2,328,296 Common Shares held in treasury).
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ¨ No x
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer: ¨ Accelerated filer: x
Non-accelerated filer: ¨ Emerging growth company ¨
If an emerging growth company that prepares its financial statements in accordance with US GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
x U.S. GAAP ¨ International Financial Reporting Standards as issued ¨ Other
by the International Accounting Standards Board
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
TABLE OF CONTENTS
|Item 1||Identity of Directors, Senior Management and Advisers||1|
|Item 2||Offer Statistics and Expected Timetable||1|
|Item 3||Key Information||2|
|Item 4||Information on the Company||17|
|Item 4A||Unresolved Staff Comments||35|
|Item 5||Operating and Financial Review and Prospects||35|
|Item 6||Directors, Senior Management and Employees||59|
|Item 7||Major Shareholders and Related Party Transactions||65|
|Item 8||Financial Information||67|
|Item 9||The Offer and Listing||68|
|Item 10||Additional Information||70|
|Item 11||Quantitative and Qualitative Disclosures About Market Risk||83|
|Item 12||Description of Securities Other Than Equity Securities||83|
|Item 13||Defaults, Dividend Arrearages and Delinquencies||84|
|Item 14||Material Modifications to the Rights of Security Holders and Use of Proceeds||84|
|Item 15||Controls and Procedures||84|
|Item 16A||Audit Committee Financial Expert||85|
|Item 16B||Code of Ethics||85|
|Item 16C||Principal Accountant Fees and Services||85|
|Item 16D||Exemptions from the Listing Standards for Audit Committees||85|
|Item 16E||Purchases of Equity Securities by the Issuer and Affiliated Purchasers||85|
|Item 16F||Change in Registrant’s Certifying Accountant||86|
|Item 16G||Corporate Governance||86|
|Item 16H||Mine Safety Disclosures||87|
|Item 17||Financial Statements||87|
|Item 18||Financial Statements||87|
In this annual report, unless the context otherwise requires:
|·||references to “Sapiens,” the “Company,” the “Registrant,” “our company,” “us,” “we” and “our” refer to Sapiens International Corporation N.V., a Curaçao company, and its consolidated subsidiaries;|
|·||references to “our shares,” “Common Shares” and similar expressions refer to Sapiens’ Common Shares, par value € 0.01 per share;|
|·||references to “Insseco” refer to Insseco Sp. Z O.O., a Poland-based software and services provider for the insurance market that Sapiens acquired in the third quarter of 2015;|
|·||references to “StoneRiver” refer to StoneRiver, Inc., a Denver, Colorado- based provider of technology solutions and services to the insurance industry that Sapiens acquired in the first quarter of 2017;|
|·||references to “dollars”, “U.S. dollars”, “U.S. $” and “$” are to United States Dollars;|
|·||references to “Euro” or “€”are to the Euro, the official currency of the Eurozone in the European Union;|
|·||references to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency;|
|·||references to the “Articles” are to our Amended Articles of Association, as currently in effect;|
|·||references to the “Securities Act” are to the Securities Act of 1933, as amended;|
|·||references to the “Exchange Act” are to the Securities Exchange Act of 1934, as amended;|
|·||references to “NASDAQ” are to the NASDAQ Stock Market;|
|·||references to the “TASE” are to the Tel Aviv Stock Exchange; and|
|·||references to the “SEC” are to the United States Securities and Exchange Commission.|
Cautionary Note Regarding Forward-Looking Statements
Certain matters discussed in this annual report are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are based on our beliefs and assumptions as well as information currently available to us. Such forward-looking statements may be identified by the use of the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “plan” and similar expressions. Such statements reflect our current views with respect to future events and are subject to certain risks and uncertainties. While we believe such forward-looking statements are based on reasonable assumptions, should one or more of the underlying assumptions prove incorrect, or these risks or uncertainties materialize, our actual results may differ materially from those expressed or implied by the forward-looking statements. Please read the risks discussed in Item 3 – “Key Information” under the caption “Risk Factors” and cautionary statements appearing elsewhere in this annual report in order to review conditions that we believe could cause actual results to differ materially from those contemplated by the forward-looking statements.
We undertake no obligation publicly to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this annual report might not occur.
|Item 1.||Identity of Directors, Senior Management and Advisers|
|Item 2.||Offer Statistics and Expected Timetable|
|Item 3.||Key Information|
|A.||Selected Financial Data.|
The following tables summarize certain selected consolidated financial data for the periods and as of the dates indicated. We derived the statement of operations financial data for the years ended December 31, 2014, 2015 and 2016 and the balance sheet data as of December 31, 2015 and 2016 from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of income financial data for the years ended December 31, 2012 and 2013 and the balance sheet data as of December 31, 2012, 2013 and 2014 are derived from our audited financial statements not included in this annual report. Our historical consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and presented in U.S. dollars. You should read the information presented below in conjunction with those statements.
The summary consolidated balance sheet data as of December 31, 2014, as derived from our audited consolidated balance sheet as of that date that appears elsewhere herein, reflects the carrying amounts combination between Sapiens and Insseco as of that date, consistent with the pooling of interest accounting method that we accorded to our acquisition of Insseco. Also consistent with that accounting method, our consolidated statements of income data for the year ended December 31, 2015 includes the revenues and expenses of Insseco for the entire year (although the acquisition was actually consummated on August 18, 2015). See also Note 1(d)(2) to our consolidated financial statements contained elsewhere in this annual report.
The information presented below is qualified by the more detailed historical consolidated financial statements, the notes thereto and the discussion under “Operating and Financial Review and Prospects” included elsewhere in this annual report.
|Selected Financial Data:||Year Ended December 31,|
|(In thousands, except per share data)|
|Statement of Income Data:||2012||2013||2014||2015(1)||2016|
|Cost of revenues||66,459||84,971||99,095||111,192||130,402|
|Research and development||10,169||11,846||11,352||10,235||16,488|
|Selling, marketing, general and administrative||25,236||26,677||32,097||39,859||44,460|
|Total operating expenses||35,405||38,523||43,449||50,094||60,948|
|Financial income, net||193||520||124||163||533|
|Income before taxes on income||12,238||12,403||15,030||24,513||25,373|
|Taxes on income||(435||)||(811||)||(454||)||(4,213||)||(5,772||)|
|Attributed to non-controlling interest||23||(12||)||131||59||(43||)|
|Attributed to redeemable non-controlling interest||-||-||(18||)||1||(134||)|
|Adjustment to redeemable non-controlling interest||-||-||-||224||442|
|Net income attributable to Sapiens||11,780||11,604||14,463||20,016||19,336|
|Basic net earnings per share attributable to Sapiens’ shareholders||$||0.29||$||0.29||$||0.31||$||0.42||$||0.40|
|Diluted net earnings per share attributable to Sapiens’ shareholders||$||0.28||$||0.27||$||0.30||$||0.41||$||0.40|
|Weighted average number of shares used in computing basic net earnings per share||39,953||40,024||47,210||48,121||48,947|
|Weighted average number of shares used in computing diluted net earnings per share||41,671||42,316||48,637||49,327||49,780|
|At December 31,|
|Balance Sheet Data:||2012||2013||2014(1)||2015||2016|
|Cash and cash equivalents||$||29,050||$||70,313||$||47,400||$||54,351||$||60,908|
|Capital stock (2)||210,594||245,205||249,938||234,658||227,463|
|(1)||As indicated above, the balance sheet data as of December 31, 2014 and the statement of income data for the year ended December 31, 2015 reflect the carrying amounts combination between Sapiens and Insseco as of December 31, 2014 and as of January 1, 2015, respectively, consistent with the pooling of interest accounting method in respect of our acquisition of Insseco.|
|(2)||In November 2012, we repurchased 2 million of our outstanding ordinary shares for total consideration of $7 million.|
On January 15, 2013, April 22, 2015 and March 31, 2016, our Board of Directors determined, subject to shareholder approval, to declare and pay one-time cash interim dividends of $0.15, $0.15 and $0.20 per Common Share (or $5.8 million, $7.2 million and $10.0 million, in the aggregate, respectively), which were paid on February 22, 2013, June 1, 2015 and June 1, 2016, respectively.
On November 19, 2013, we consummated an underwritten follow-on public offering of 5,650,000 of our Common Shares, plus an additional 847,400 Common Shares to cover over-allotments, pursuant to an underwriting agreement with Barclays Capital Inc., as representative of certain underwriters.
|B.||Capitalization and Indebtedness.|
|C.||Reasons for the Offer and Use of Proceeds.|
We operate globally in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of those risks and uncertainties that may have a material adverse effect on our business, financial position, results of operations or cash flows.
Risks Relating to Our Business, Our Industry and our Financing Activities
Our development cycles are lengthy, we may not have the resources available to complete development of new, enhanced or modified solutions and we may incur significant expenses before we generate revenues, if any, from our solutions.
Because our solutions are complex and require rigorous testing, development cycles can be lengthy, taking us up to two years to develop and introduce new, enhanced or modified solutions. Moreover, development projects can be technically challenging and expensive. The nature of these development cycles may cause us to experience delays between the time we incur expenses associated with research and development and the time we generate revenues, if any, from such expenses. We may also not have sufficient funds or other resources to make the required investments in product development. Furthermore, we may invest substantial resources in the development of solutions that do not achieve market acceptance or commercial success. Even where we succeed in our sales efforts and obtain new orders from customers, the complexity involved in delivering our solutions to such customers makes it more difficult for us to consummate delivery in a timely manner and to recognize revenue and maximize profitability. Failure to deliver our solutions in a timely manner could result in order cancellations, damage our reputations and require us to indemnify our customers. Any of these risks relating to our lengthy and expensive development cycle could have a material adverse effect on our business, financial conditions and results of operations.
Our sales cycle is variable and often lengthy, depends upon many factors outside our control, and requires us to expend significant time and resources prior to generating associated revenues.
The typical sales cycle for our solutions and services is lengthy and unpredictable, requires pre-purchase evaluation by a significant number of persons in our customers’ organizations, and often involves a significant operational decision by our customers. Our sales efforts involve educating our customers and industry analysts and consultants about the use and benefits of our solutions, including the technical capabilities of our solutions and the efficiencies achievable by organizations deploying our solutions. Customers typically undertake a significant evaluation process, which frequently involves not only our solutions, but also those of our competitors and can result in a lengthy sales cycle. Our sales cycle for new customers is typically six to eighteen months and can extend even longer in some cases. We spend substantial time, effort and money in our sales efforts without any assurance that such efforts will produce any sales.
Investment in highly skilled research and development and customer support personnel is critical to our ability to develop and enhance our solutions and support our customers, but an increase in such investment may reduce our profitability.
As a provider of software solutions that rely upon technological advancements, we rely heavily on our research and development activities to remain competitive. We consequently depend in large part on the ability to attract, train, motivate and retain highly skilled information technology professionals for our research and development team, particularly individuals with knowledge and experience in the insurance industry. Because our software solutions are highly complex and are generally used by our customers to perform critical business functions, we also depend heavily on other skilled technology professionals to provide ongoing support to our customers. Skilled technology professionals are often in high demand and short supply. If we are unable to hire or retain qualified research and development personnel and other technology professionals to develop, implement and modify our solutions, we may be unable to meet the needs of our customers. Even if we succeed in retaining the necessary skilled personnel in our research and development and customer support efforts, our investments in our personnel and product development efforts increase our costs of operations and thereby reduce our profitability, unless accompanied by increased revenues. Given the highly competitive industry in which we operate, we may not succeed in increasing our revenues in line with our increasing investments in our personnel and research and development efforts.
Furthermore, if we seek to expand the marketing and offering of our products into new territories, it would require the retention of new, additional skilled personnel with knowledge of the particular market and applicable regulatory regime. Such skilled personnel may not be available at a reasonable cost relative to the additional revenues that we expect to generate in those territories, or may not be available at all.
If existing customers are not satisfied with our solutions and services and either do not make subsequent purchases from us or do not continue using such solutions and services, or if our relationships with our largest customers are impaired, our revenue could be negatively affected.
We depend heavily on repeat product and service revenues from our base of existing customers. Five of our customers accounted for, in the aggregate, 32% and 34% of our revenues in the years ended December 31, 2015 and 2016, respectively. If our existing customers are not satisfied with our solutions and services, they may not enter into new project contracts with us or continue using our technologies. A significant decline in our revenue stream from existing customers would have a material adverse effect on our business, results of operations and financial condition.
The implementation of our M&A growth strategy, which requires the integration of our multiple acquired companies, including, most recently, StoneRiver, MaxPro, 4Sight, Insseco and IBEXI Solutions Private Limited, and their respective businesses, operations and employees with our own, involves significant risks, and the failure to integrate successfully may adversely affect our future results.
In the past six years we have completed eight acquisitions. Most recently, in 2017, we have acquired StoneRiver, after having acquired Maximum Processing Inc, or MaxPro, and 4Sight Business Intelligence, or 4Sight, in 2016, and IBEXI Solutions Private Limited, or IBEXI, and Insseco in 2015. These acquisitions are part of our integrated M&A growth strategy, which is centered on three key factors: growing our customer base, expanding geographically and adding complementary solutions to our portfolio— all while we seek to ensure our continued high quality of services and product delivery. Any failure to successfully integrate the business, operations and employees of our acquired companies, or to otherwise realize the anticipated benefits of these acquisitions, could harm our results of operations. Our ability to realize these benefits will depend on the timely integration and consolidation of organizations, operations, facilities, procedures, policies and technologies, and the harmonization of differences in the business cultures between these companies and their personnel. Integration of these businesses will be complex and time-consuming, will involve additional expense and could disrupt our business and divert management’s attention from ongoing business concerns. The challenges involved in integrating IBEXI, Insseco, MaxPro, 4Sight and StoneRiver include:
|·||preserving customer, supplier and other important relationships;|
|·||integrating financial forecasting and controls, procedures and reporting cycles;|
|·||combining and integrating information technology, or IT, systems; and|
|·||integrating employees and related HR systems and benefits, maintaining employee morale and retaining key employees.|
The benefits we expect to realize from these acquisitions are, necessarily, based on projections and assumptions about the combined businesses of our company, IBEXI, Insseco, MaxPro, 4Sight and StoneRiver, and assume, among other things, the successful integration of IBEXI, Insseco, MaxPro, 4Sight and StoneRiver into our business and operations. The acquisition of StoneRiver, in particular, is expected to significantly expand our presence and scale in the North American insurance industry, and to help us further accelerate our growing market footprint in the U.S. P&C space. Our projections and assumptions concerning our acquisitions may be inaccurate, however, and we may not successfully integrate the acquired companies and our operations in a timely manner, or at all. We may also be exposed to unexpected contingencies or liabilities of the acquired companies. If we do not realize the anticipated benefits of these transactions, our growth strategy and future profitability could be adversely affected.
Failure to manage our rapid growth effectively could harm our business.
We have recently experienced, and expect to continue to experience, rapid growth in our number of employees and in our international operations that has placed, and will continue to place, a significant strain on our operational and financial resources and our personnel. To manage our anticipated future growth effectively, we must continue to maintain and may need to enhance our information technology infrastructure, financial and accounting systems and controls and manage expanded operations and employees in geographically distributed locations. We also must attract, train and retain a significant number of additional qualified sales and marketing personnel, professional services personnel, software engineers, technical personnel and management personnel. Our failure to manage our rapid growth effectively could have a material adverse effect on our business, results of operations and financial condition. Our growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of new services or product enhancements. For example, since it may take as long as six months to hire and train a new member of our professional services staff, we make decisions regarding the size of our professional services staff based upon our expectations with respect to customer demand for our products and services. If these expectations are incorrect, and we increase the size of our professional services organization without experiencing an increase in sales of our products and services, we will experience reductions in our gross and operating margins and net income. If we are unable to effectively manage our growth, our expenses may increase more than expected, our revenues could decline or grow more slowly than expected and we may be unable to implement our business strategy. We also intend to continue to expand into additional international markets which, if not technologically or commercially successful, could harm our financial condition and prospects.
We may be liable to our clients for damages caused by a violation of intellectual property rights, the disclosure of other confidential information, including personally identifiable information, system failures, errors or unsatisfactory performance of services, and our insurance policies may not be sufficient to cover these damages.
We often have access to, and are required to collect and store, sensitive or confidential client information, including personally identifiable information. Some of our client agreements do not limit our potential liability for breaches of confidentiality, infringement indemnity and certain other matters. Furthermore, breaches of confidentiality may entitle the aggrieved party to equitable remedies, including injunctive relief. If any person, including any of our employees and subcontractors, penetrates our network security or misappropriates sensitive or confidential client information, including personally identifiable information, we could be subject to significant liability from our clients or from our clients’ customers for breaching contractual confidentiality provisions or privacy laws. Despite measures we take to protect the intellectual property and other confidential information or personally identifiable information of our clients, unauthorized parties, including our employees and subcontractors, may attempt to misappropriate certain intellectual property rights that are proprietary to our clients or otherwise breach our clients’ confidences. Unauthorized disclosure of sensitive or confidential client information, including personally identifiable information, or a violation of intellectual property rights, whether through employee misconduct, breach of our computer systems, systems failure or otherwise, may subject us to liabilities, damage our reputation and cause us to lose clients.
Many of our contracts involve projects that are critical to the operations of our clients’ businesses and provide benefits to our clients that may be difficult to quantify. Any failure in a client’s system or any breach of security could result in a claim for substantial damages against us, regardless of our responsibility for such failure. Furthermore, any errors by our employees in the performance of services for a client, or poor execution of such services, could result in a client terminating our engagement and seeking damages from us.
In addition, while we have taken steps to protect the confidential information that we have access to, including confidential information we may obtain through usage of our cloud-based services, our security measures may be breached. If a cyber-attack or other security incident were to result in unauthorized access to or modification of our customers’ data or our own data or our IT systems or in disruption of the services we provide to our customers, or if our products or services are perceived as having security vulnerabilities, we could suffer significant damage to our business and reputation.
Although we attempt to limit our contractual liability for consequential damages in rendering our services, these limitations on liability may not apply in all circumstances, may be unenforceable in some cases, or may be insufficient to protect us from liability for damages. There may be instances when liabilities for damages are greater than the insurance coverage we hold and we will have to internalize those losses, damages and liabilities not covered by our insurance.
Changes in privacy regulations may impose additional costs and liabilities on us, limit our use of information, and adversely affect our business.
Personal privacy has become a significant issue in the United States, Europe, and many other countries where we operate. Many government agencies and industry regulators continue to impose new restrictions and modify existing requirements about the collection, use, and disclosure of personal information. Changes to laws or regulations affecting privacy and security may impose additional liability and costs on us and may limit our use of such information in providing our services to customers. If we were required to change our business activities, revise or eliminate services or products, or implement burdensome compliance measures, our business and results of operations may be harmed. Additionally, we may be subject to regulatory enforcement actions resulting in fines, penalties, and potential litigation if we fail to comply with applicable privacy laws and regulations.
Errors or defects in our software solutions could inevitably arise and would harm our profitability and our reputation with customers, and could even give rise to liability claims against us.
The quality of our solutions, including new, modified or enhanced versions thereof, is critical to our success. Since our software solutions are complex, they may contain errors that cannot be detected at any point in their testing phase. While we continually test our solutions for errors or defects and work with customers to identify and correct them, errors in our technology may be found in the future. Testing for errors or defects is complicated because it is difficult to simulate the breadth of operating systems, user applications and computing environments that our customers use and our solutions themselves are increasingly complex. Errors or defects in our technology have resulted in terminated work orders and could result in delayed or lost revenue, diversion of development resources and increased services, termination of work orders, damage to our brand and warranty and insurance costs in the future. In addition, time-consuming implementations may also increase the number of services personnel we must allocate to each customer, thereby increasing our costs and adversely affecting our business, results of operations and financial condition.
In addition, since our customers rely on our solutions to operate, monitor and improve the performance of their business processes, they are sensitive to potential disruptions that may be caused by the use of, or any defects in, our software. As a result, we may be subject to claims for damages related to software errors in the future. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. Regardless of whether we prevail, diversion of key employees’ time and attention from our business, the incurrence of substantial expenses and potential damage to our reputation might result. While the terms of our sales contracts typically limit our exposure to potential liability claims and we carry errors and omissions insurance against such claims, there can be no assurance that such insurance will continue to be available on acceptable terms, if at all, or that such insurance will provide us with adequate protection against any such claims. A significant liability claim against us could have a material adverse effect on our business, results of operations and financial position.
Failure to meet customer expectations with respect to the implementation and use of our solutions could result in negative publicity, reduced sales and diversion of resources.
We generally provide our customers with upfront estimates regarding the duration, budget and costs associated with the implementation of our products. Implementation of our solutions is complex and meeting the anticipated duration, budget and costs often depend on factors relating to our customers or their other vendors. We may not meet the upfront estimates and expectations of our customers for the implementation of our solutions or the provision of our services as a result of factors within our control such as issues or limitations with our solutions, or factors beyond our control such as issues related to our system integrator partners or our customers’ IT employees.
If we fail to meet upfront estimates and the expectations of our customers for the implementation of our solutions, our reputation could be harmed, which could adversely affect our ability to attract new customers and sell additional solutions and services to existing customers.
Our business involves long-term, large projects, some of which are fixed-price projects that involve uncertainties, such as estimated project costs and profit margins, and which can therefore adversely affect our results of operations.
Our business is characterized by relatively large projects or engagements that can have a significant impact on our total revenue and cost of revenue from quarter to quarter. A high percentage of our expenses, particularly employee compensation, are relatively fixed. Therefore, a variation in the timing of the initiation, progress or completion of projects or engagements can cause significant variations in operating results from quarter to quarter.
This is particularly the case on fixed-price contracts. Some of our solutions and services are sold as fixed-price projects with delivery requirements spanning more than one year. As our projects can be highly complex, we may not be able to accurately estimate our actual costs of completing a fixed-price project. If our actual cost-to-completion of these projects exceeds significantly the estimated costs, we could experience a loss on the related contracts, which would have a material adverse effect on our results of operations, financial position and cash flow.
Similarly, delays in executing client contracts (whether fixed price or not) may affect our revenue and cause our operating results to vary widely. Our solutions are delivered over periods of time ranging from several months to a few years. Payment terms are generally based on periodic payments or on the achievement of milestones. Any delays in payment or in the achievement of milestones may have a material adverse effect on our results of operations, financial position or cash flows.
The market for software solutions and related services is highly competitive.
The market for software solutions and related services and for business solutions for the insurance and financial services industry in particular, is highly competitive. Many of our smaller competitors have been acquired by larger competitors, which provides such smaller competitors with greater resources and potentially a larger client base for which they can develop solutions. Our customers or potential customers may prefer suppliers that are larger than us, are better known in the market or that have a greater global reach. In addition, we and some of our competitors have developed systems to allow customers to outsource their core systems to external providers (known as BPO). We are seeking to partner with BPO providers, but there can be no assurance that such BPO providers will adopt our solutions rather than those of our competitors. Determinations by current and potential customers to use BPO providers that do not use our solutions may result in the loss of such customers and limit our ability to gain new customers.
Consolidation in the insurance industry in which some of our clients operate also increases competitiveness for us by reducing the number of potential clients for whose business we and our competitors compete. The high level of continuity with which insurance and other financial services clients remain with their providers of software-related services also increases general competitiveness by tying clients to their service providers and thereby shrinking the market of potential clients.
Incorrect or improper use of our products or our failure to properly train customers on how to implement or utilize our products could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition and growth prospects.
Our products are complex and are deployed in a wide variety of network environments. The proper use of our solutions requires training of the customer. If our solutions are not used correctly or as intended, inadequate performance may result. Additionally, our customers or third-party partners may incorrectly implement or use our solutions. Our solutions may also be intentionally misused or abused by customers or their employees or third parties who are able to access or use our solutions. Similarly, our solutions are sometimes installed or maintained by customers or third parties with smaller or less qualified IT departments, potentially resulting in sub-optimal installation and, consequently, performance that is less than the level anticipated by the customer. Because our customers rely on our software, services and maintenance support to manage a wide range of operations, the incorrect or improper use of our solutions, our failure to properly train customers on how to efficiently and effectively use our solutions, or our failure to properly provide implementation or maintenance services to our customers has resulted in terminated work orders and may result in termination of work orders, negative publicity or legal claims against us in the future. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our software and services.
In addition, if there is substantial turnover of customer personnel responsible for implementation and use of our products, or if customer personnel are not well trained in the use of our products, customers may defer the deployment of our products, may deploy them in a more limited manner than originally anticipated or may not deploy them at all. Further, if there is substantial turnover of the customer personnel responsible for implementation and use of our products, our ability to make additional sales may be substantially limited.
Assertions by third parties of infringement or other violation by us of their intellectual property rights could result in significant costs and substantially harm our business and results of operations.
The software industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual property rights. In particular, leading companies in the software industry own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us. From time to time, third parties, including certain of these leading companies, may assert patent, copyright, trademark or other intellectual property claims against us, our customers and partners, and those from whom we license technology and intellectual property.
Although we believe that our products and services do not infringe upon the intellectual property rights of third parties, we cannot assure you that third parties will not assert infringement or misappropriation claims against us with respect to current or future products or services, or that any such assertions will not require us to enter into royalty arrangements or result in costly litigation, or result in us being unable to use certain intellectual property. We cannot assure you that we are not infringing or otherwise violating any third party intellectual property rights. Infringement assertions from third parties may involve patent holding companies or other patent owners who have no relevant product revenues, and therefore our own issued and pending patents may provide little or no deterrence to these patent owners in bringing intellectual property rights claims against us.
Any intellectual property infringement or misappropriation claim or assertion against us, our customers or partners, and those from whom we license technology and intellectual property could have a material adverse effect on our business, financial condition, reputation and competitive position regardless of the validity or outcome. If we are forced to defend against any infringement or misappropriation claims, whether they are with or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and financial resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed on a party’s intellectual property; cease making, licensing or using our products or services that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to redesign our products or services; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or works; and to indemnify our partners, customers, and other third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. Any of these events could seriously harm our business, results of operations and financial condition. In addition, any lawsuits regarding intellectual property rights, regardless of their success, could be expensive to resolve and divert the time and attention of our management and technical personnel.
Although we apply measures to protect our intellectual property rights and our source code, there can be no assurance that the measures that we employ to do so will be successful.
In accordance with industry practice, since we have no registered patents on our software solution technologies, we rely on a combination of contractual provisions and intellectual property law to protect our proprietary technology. We believe that due to the dynamic nature of the computer and software industries, copyright protection is less significant than factors such as the knowledge and experience of our management and personnel, the frequency of product enhancements and the timeliness and quality of our support services. We seek to protect the source code of our products as trade secret information and as unpublished copyright works. We also rely on security and copy protection features in our proprietary software. We distribute our products under software license agreements that grant customers a personal, non-transferable license to use our products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. In addition, while we attempt to protect trade secrets and other proprietary information through non-disclosure agreements with employees, consultants and distributors, not all of our employees have signed invention assignment agreements. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. Our failure to protect our rights, or the improper use of our products by others without licensing them from us could have a material adverse effect on our results of operations and financial condition.
We and our customers rely on technology and intellectual property of third parties, the loss of which could limit the functionality of our products and disrupt our business.
We use technology and intellectual property licensed from unaffiliated third parties in certain of our products, and we may license additional third-party technology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors that could harm our brand and business. In addition, licensed technology and intellectual property may not continue to be available on commercially reasonable terms, or at all. The loss of the right to license and distribute this third party technology could limit the functionality of our products and might require us to redesign our products.
Further, although we believe that there are currently adequate replacements for the third-party technology and intellectual property we presently use and distribute, the loss of our right to use any of this technology and intellectual property could result in delays in producing or delivering affected products until equivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Our business would be disrupted if any technology and intellectual property we license from others or functional equivalents of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required either to attempt to redesign our products to function with technology and intellectual property available from other parties or to develop these components ourselves, which would result in increased costs and could result in delays in product sales and the release of new product offerings. Alternatively, we might be forced to limit the features available in affected products. Any of these results could harm our business and impact our results of operations.
We could be required to provide the source code of our products to our customers.
Some of our customers have the right to require the source code of our products to be deposited into a source code escrow. Under certain circumstances, our source code could be released to our customers. The conditions triggering the release of our source code vary by customer. A release of our source code would give our customers access to our trade secrets and other proprietary and confidential information which could harm our business, results of operations and financial condition.
Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.
A significant invasion, interruption, destruction or breakdown of our information technology systems and/or infrastructure by persons with authorized or unauthorized access could negatively impact our business and operations. We could also experience business interruption, information theft and/or reputational damage from cyber attacks, which may compromise our systems and lead to data leakage either internally or at our third party providers. Our systems have been, and are expected to continue to be, the target of malware and other cyber attacks. Although we have invested in measures to reduce these risks, we cannot assure you that these measures will be successful in preventing compromise and/or disruption of our information technology systems and related data.
Catastrophes may adversely impact the P&C insurance industry, preventing us from expanding or maintaining our existing customer base and increasing our revenues.
Our customers include P&C insurance carriers that have experienced, and will likely experience in the future, catastrophe losses that adversely impact their businesses. Catastrophes can be caused by various events, including, amongst others, hurricanes, tsunamis, floods, windstorms, earthquakes, hail, tornados, explosions, severe weather and fires. Moreover, acts of terrorism or war could cause disruptions in our or our customers’ businesses or the economy as a whole. The risks associated with natural disasters and catastrophes are inherently unpredictable, and it is difficult to predict the timing of such events or estimate the amount of loss they will generate. In the event a future catastrophe adversely impacts our current or potential customers, we may be prevented from maintaining and expanding our customer base and from increasing our revenues because such events may cause customers to postpone purchases of new products and professional service engagements or discontinue projects.
There may be consolidation in the P&C insurance industry, which could reduce the use of our products and services and adversely affect our revenues.
Mergers or consolidations among our customers could reduce the number of our customers and potential customers. This could adversely affect our revenues even if these events do not reduce the aggregate number of customers or the activities of the consolidated entities. If our customers merge with or are acquired by other entities that are not our customers, or that use fewer of our products and services, they may discontinue or reduce their use of our products and services. Any of these developments could materially and adversely affect our results of operations and cash flows.
Some of our services and technologies may use “open source” software, which may restrict how we use or distribute our services or require that we release the source code of certain products subject to those licenses.
Some of our services and technologies may incorporate software licensed under so-called “open source” licenses, including, but not limited to, the GNU General Public License and the GNU Lesser General Public License. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on origin of the software. Additionally, open source licenses typically require that source code subject to the license be made available to the public and that any modifications or derivative works to open source software continue to be licensed under open source licenses. These open source licenses typically mandate that proprietary software, when combined in specific ways with open source software, become subject to the open source license. If we combine our proprietary software with open source software, we could be required to release the source code of our proprietary software.
We take steps to ensure that our proprietary software is not combined with, and does not incorporate, open source software in ways that would require our proprietary software to be subject to an open source license. However, few courts have interpreted open source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. Additionally, we rely on multiple software programmers to design our proprietary technologies, and although we take steps to prevent our programmers from including open source software in the technologies and software code that they design, write and modify, we do not exercise complete control over the development efforts of our programmers and we cannot be certain that our programmers have not incorporated open source software into our proprietary products and technologies or that they will not do so in the future. In the event that portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our services and technologies and materially and adversely affect our business, results of operations and prospects.
Our indebtedness is subject to a floating interest rate and subjects us to debt service obligations that could have an adverse effect on our continuing liquidity and financial condition.
The repayment of the principal amount of the bank debt that we incurred in connection with our acquisition of StoneRiver, which was initially $40 million, is subject to the terms of the credit agreement that we entered into with the lender, HSBC Bank USA, National Association. The interest rate payable on the loan is LIBOR plus 1.85%. Until repayment of the bank debt, we are subject to certain financial covenants. Our ability to make due payment of principal and interest and comply with the financial and other covenants under the credit agreement is subject to the risk factors described herein, and any failure to comply with the covenants could have an adverse effect on our liquidity and operations. This debt requires us to dedicate a portion of our cash flow to debt service, could impair our ability to obtain additional financing for capital expenditures or other purposes, could hinder our ability to adjust rapidly to changing market conditions and competitive pressures, and could make us more vulnerable in the event of a downturn in our business or deterioration of general economic conditions. For further information concerning our indebtedness, see “Liquidity and Capital Resources” in Item 5 below and “HSBC Term Loan Credit Agreement” in Item 10.C below. Additionally, since our debt is subject to a floating rate of interest, an increase in LIBOR could adversely affect us.
Risks Relating to Our International Operations
Our international sales and operations subject us to additional risks that can adversely affect our business, results of operations and financial condition.
We are continuing to expand our international operations as part of our growth strategy. In fiscal years 2015 and 2016, 67% and 66%, respectively, of our revenues were derived from outside of North America. Our current international operations and our plans to further expand our international operations subject us to a variety of risks, including:
|•||increased exposure to fluctuations in foreign currency exchange rates;|
|•||complexity in our tax planning, and increased exposure to changes in tax regulations in various jurisdictions in which we operate, which could adversely affect our operating results and frustrate our ability to conduct effective tax planning;|
|•||increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations;|
|•||longer payment cycles and difficulties in enforcing contracts and collecting accounts receivable;|
|•||the need to localize our products and licensing programs for international customers;|
|•||lack of familiarity with and unexpected changes in foreign regulatory requirements;|
|•||the burdens of complying with a wide variety of foreign laws and legal standards;|
|•||compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, particularly in emerging market countries;|
|•||import and export license requirements, tariffs, taxes and other trade barriers;|
|•||increased financial accounting and reporting burdens and complexities;|
|•||weaker protection of intellectual property rights in some countries;|
|•||multiple and possibly overlapping tax regimes; and|
|•||political, social and economic instability abroad, terrorist attacks and security concerns in general.|
As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Any of these risks could harm our international operations and reduce our international sales, adversely affecting our business, results of operations, financial condition and growth prospects.
International operations in the insurance industry, in which a significant portion of our business is concentrated, is accompanied by additional costs related to adaptation to specific territories.
As we seek to expand the marketing and offering of our products into new territories, because insurance regulations vary by legal jurisdiction, the investment required to adapt our solutions to the legal and language requirements of such territories may prevent or delay us from effectively expanding into such territories. Such adaptation process requires the retention of new, additional skilled personnel with knowledge of the particular market and applicable regulatory regime. Such skilled personnel may not be available at a reasonable cost relative to the additional revenues that we expect to recognize in those territories, or may not be available at all.
Our international operations expose us to risks associated with fluctuations in foreign currency exchange rates that could adversely affect our business.
Most of our revenues are derived from international operations that are conducted in local currencies, including US dollars, GBP, EURO, New Israeli Shekels, or NIS, Japanese Yen, or JPY, Indian rupee, or INR and Polish zloty, or PLN. In 2015 and 2016, our revenues were approximately 36% and 37%, respectively, in US dollars, with the remainder in the other currencies.
Because exchange rates between the NIS, GBP, Euro, JPY, INR and the PLN against the US dollar fluctuate continuously, exchange rate fluctuations and especially larger periodic devaluations could negatively affect our revenue and profitability.
In certain locations, we engage in currency-hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our financial position and results of operations. However, there can be no assurance that any such hedging transactions will materially reduce the effect of fluctuation in foreign currency exchange rates on such results. In addition, if for any reason exchange or price controls or other restrictions on the conversion of foreign currencies were imposed, our financial position and results of operations could be adversely affected.
The tax benefits that are available to our Israeli subsidiaries require us to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.
Some of our Israeli subsidiaries have been granted “Approved Enterprise” and “Benefited Enterprise” status, which provide certain benefits, including tax exemptions and reduced tax rates under the Israeli Law for the Encouragement of Capital Investments, 1959, referred to as the Investment Law. Income not eligible for Approved Enterprise and Benefited Enterprise benefits is taxed at the regular corporate tax rate (25% in 2016, 24% in 2017 and 23% in 2018 and thereafter).
In the event of distribution of dividends from said tax-exempt income, the amount distributed will be subject to corporate tax at the rate that would have otherwise been applicable on the Approved/Benefited Enterprise’s income.
The entitlement to the above benefits is conditional upon the fulfillment of the conditions stipulated by the Investment Law and applicable regulations. Should the Israeli subsidiaries fail to meet such requirements, income attributable to the Approved Enterprise and Benefited Enterprise programs could be subject to the statutory Israeli corporate tax rate and they may be required to refund a portion of the tax benefits already received with respect to such programs.
Risks Related to an Investment in our Common Shares
There is limited trading volume for our common shares, which reduces liquidity for our shareholders, and may furthermore cause the share price to be volatile, all of which may lead to losses by investors.
There has historically been limited trading volume in our common shares, both on the NASDAQ Capital Market and the TASE. While recently there has been improvement, the trading volume is still limited, which results in reduced liquidity for our shareholders. As a further result of the limited volume, our common shares have experienced significant market price volatility in the past and may experience significant market price and volume fluctuations in the future, in response to factors such as announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results and general conditions in the industry in which we compete.
We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange Act and are permitted to file less information with the SEC than a domestic U.S. reporting company, which reduces the level and amount of disclosure that you receive.
As a foreign private issuer under the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act; and are not required to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our common shares. Accordingly, you receive less information about our company than you would receive about a domestic U.S. company, and are afforded less protection under the U.S. federal securities laws than you would be afforded in holding securities of a domestic U.S. company.
As a foreign private issuer, we are also permitted, and have begun, to follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. We have informed NASDAQ that we follow home country practice in Curaçao with regard to, among other things, composition of our Board of Directors (whereby a majority of the members of our Board of Directors need not be “independent directors,” as is generally required for domestic U.S. issuers), director nomination procedure and approval of compensation of officers. In addition, we have opted to follow home country law instead of the Listing Rules of the NASDAQ Stock Market that require that a listed company obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control of the Company, certain transactions other than a public offering involving issuances of a 20% or greater interest in the Company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on the NASDAQ Capital Market may provide our shareholders with less protection than they would have as stockholders of a domestic U.S. company.
Our controlling shareholder, Formula Systems (1985) Ltd., beneficially owns approximately 48.9% of our outstanding Common Shares and therefore asserts a controlling influence over matters requiring shareholder approval, which could delay or prevent a change of control that may benefit our public shareholders.
Formula Systems (1985) Ltd. beneficially owns approximately 48.9% of our outstanding Common Shares. As a result, it exercises a controlling influence over our operations and business strategy and has sufficient voting power to control the outcome of various matters requiring shareholder approval. These matters may include:
|■||the composition of our board of directors, which has the authority to direct our business and to appoint and remove our officers;|
|■||approving or rejecting a merger, consolidation or other business combination;|
|■||raising future capital; and|
|■||amending our Articles, which govern the rights attached to our Common Shares.|
This concentration of ownership of our Common Shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our Common Shares that might otherwise give you the opportunity to realize a premium over the then-prevailing market price of our Common Shares. This concentration of ownership may also adversely affect our share price.
Risks Related to Our Israeli Operations and Our Status as a Curaçao Company
The Israeli government grants that our Israeli subsidiary has received require us to meet several conditions and restrict our ability to manufacture products and transfer know-how developed using such grants outside of Israel and require us to satisfy specified conditions.
One of our Israeli subsidiaries received grants in the past from the government of Israel through the National Technological Innovation Authority, or the Innovation Authority (formerly operating as Office of the Chief Scientist of the Ministry of Economy of the State of Israel, or the OCS), for the financing of a portion of its research and development expenditures in Israel with respect to our legacy technology. In consideration for receiving grants from the OCS, we are obligated to pay the Innovation Authority royalties from the revenues generated from the sale of products (and related services) developed (in whole or in part) using the OCS funds, in an amount that is up to 100% to 150% of the aggregate amount of the total grants that we received from the OCS, plus annual interest for grants received after January 1, 1999. We must fully and originally own any intellectual property developed using the OCS grants and any right derived therefrom unless transfer thereof is approved in accordance with the provisions of the Israeli Encouragement of Research, Development and Technological Innovation Law, 5744-1984, or the Innovation Law (formerly known as the Encouragement of Industrial Research and Development Law, 5744-1984, or the Research Law), and related regulations.
When a company develops know-how, technology or products using grants provided by the Innovation Authority, the terms of these grants and the Innovation Law restrict the transfer of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how outside of Israel. Even after the repayment of such grants in full, we will remain subject to the restrictions set forth under the Innovation Law, including:
|·||Transfer of know-how outside of Israel. Any transfer of the know-how that was developed with the funding of the Innovation Authority, outside of Israel, requires prior approval of the Innovation Authority, and the payment of a redemption fee.|
|·||Local manufacturing obligation. The terms of the grants under the Innovation Law require that the manufacturing of products resulting from Innovation Authority-funded programs be carried out in Israel, unless a prior written approval of the Innovation Authority is obtained (except for a transfer of up to 10% of the production rights, for which a notification to the Innovation Authority is sufficient).|
|·||Certain reporting obligations. We, as any recipient of a grant or a benefit under the Innovation Law, are required to file reports on the progress of activities for which the grant was provided as well as on our revenues from know-how and products funded by the Innovation Authority. In addition, we are required to notify the Innovation Authority of certain events detailed in the Innovation Law.|
Therefore, if aspects of our technologies are deemed to have been developed with OCS funding, the discretionary approval of an OCS committee would be required for any transfer to third parties outside of Israel of know-how or manufacturing or manufacturing rights related to those aspects of such technologies. We may not receive those approvals. Furthermore, the OCS may impose certain conditions on any arrangement under which it permits us to transfer technology or development out of Israel.
The transfer of OCS-supported technology or know-how outside of Israel may involve the payment of significant amounts, depending upon the value of the transferred technology or know-how, the amount of OCS support, the time of completion of the OCS-supported research project and other factors. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with OCS funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the OCS.
We received grants from the OCS prior to an extensive amendment to the Research Law that came into effect as of January 1, 2016, or the Amendment, which may also affect the terms of existing grants. The Amendment provides for an interim transition period (which has not yet expired), after which time our grants will be subject to terms of the Amendment. Under the Research Law, as amended by the Amendment, the Authority is provided with a power to modify the terms of existing grants. Such changes, if introduced by the Authority in the future, may impact the terms governing our grants.
We are not subject to the supervision of the Central Bank of Curaçao and Sint Maarten, so our shareholders are not protected by any regulatory inspections in Curaçao.
We are not subject to any regulatory supervision in Curaçao by the Central Bank of Curaçao and Sint Maarten. As a result, shareholders are not protected by any regulatory supervision or inspections by any regulatory agency in Curaçao, and we are not required to observe any restrictions in respect of its conduct, except to the extent disclosed in our annual report or our Articles.
We have been granted an exemption under the Foreign Exchange Regulations Curaçao and Sint Maarten enacted by the Central Bank of Curaçao and Sint Maarten (referred to as the FX Regulations). As a result of this exemption, we are exempted from certain conditions, regulations and provisions stemming from the FX Regulations relating to, among other things, capital transactions with non-residents of Curaçao (including dividend payments) and license fees on payments to non-residents of Curaçao. The exemption has been granted subject to our compliance with certain conditions, and the Central Bank of Curaçao and Sint Maarten can revoke the exemption should we no longer comply with one or more of those conditions. Those conditions include that none of our activities may take place in Curaçao or Sint Maarten, that we may not offer goods and services to residents of Curaçao or Sint Maarten, that we may not participate in Curaçao and Sint Maarten resident companies and that we may not extend loans to residents of Curaçao or Sint Maarten. Furthermore, residents of Curaçao or Sint Maarten may not be holders of our Common Shares.
The rights of shareholders under Curaçao law differ from those under U.S. law, and you may have fewer protections as a shareholder.
Our corporate affairs are governed by our Articles, the Civil Code of Curaçao and the civil law of Curaçao. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under Curaçao law are to a large extent governed by the Civil Code of Curaçao, the civil law of Curaçao and applicable case law. The rights of shareholders and the fiduciary responsibilities of our directors under Curaçao law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the U.S. In particular, Curaçao has a less developed body of securities laws as compared to the U.S., and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law. In addition, Curaçao law does not generally distinguish between public and private companies, and some of the protections and safeguards (such as statutory pre-emption rights, except to the extent that they are expressly provided for in the Articles) that investors may expect to find in relation to a public company are not provided for under Curaçao law. As a result of all of the above, holders of our Common Shares may have more difficulty in protecting their interests in the face of actions taken by our management, directors or major shareholders than they would as shareholders of a U.S. company.
Shareholders in Curaçao companies may not be able to initiate shareholder derivative actions, thereby depriving a shareholder of the ability to protect its interests.
Derivative actions are not permitted in Curaçao. Under Curaçao law, only the Company may bring a civil action against a person who is liable to a Curaçao public limited liability company. Shareholders in Curaçao companies may not have standing to initiate a shareholder derivative action in a federal court of the U.S. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a Curaçao company being more limited than those of shareholders of a company organized in the U.S. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The Curaçao courts are also unlikely to: (i) recognize or enforce against us judgments of courts in the U.S. based on certain civil liability provisions of U.S. securities law; or (ii) to impose liabilities against us, in original actions brought in Curaçao, based on certain civil liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in Curaçao of judgments obtained in the U.S., although the courts of Curaçao will in certain circumstances recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
The laws of Curaçao provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs.
Under the laws of Curaçao, there is little statutory protection for minority shareholders other than the provisions of the Civil Code of Curaçao, which provides for shareholder remedies. Minority shareholders of a Curaçao company may commence legal proceedings against the company in which they hold shares on the following grounds:
|•||tort (onrechtmatige daad)- a tortious act may arise if a company makes certain promises to the shareholders, the shareholders could expect a certain attitude from the company according to rules of “reasonableness and fairness,” and the company does not comply therewith;|
|•||breach of contract- assuming there is any specific contract between the minority shareholders and the company; and|
|•||nullification of resolutions- if a resolution is approved in violation of the provisions of Curacao law or the articles of association as to how the decision needs to be taken, or in violation of rules, or in case a resolution to amend the articles adversely affects the legal position of a person involved in the company (such as a minority shareholder), provided such person has a serious interest, the resolution can be nullified.|
Under Curaçao law, shareholders who satisfy certain threshold requirements can initiate inquiry proceedings with the joint Court of Justice of Aruba, Curaçao, Sint Maarten, Bonaire, Sint Eustatius and Saba. Such inquiry proceedings can relate to the policy of the company and its business as well as to the (deficient) functioning of the company as such. The Court of Justice will only order an inquiry if it finds that well-founded reasons exist to doubt the soundness of the policies of the company or the conduct of its business. This is not restricted to the policies of the governing bodies of the company (for example, the board) but can also pertain to acts or omissions of the general meeting of shareholders. During the proceedings, the Court of Justice may impose immediate provisional measures, such as a temporary amendment to the articles of association of the company and the appointment of interim board members.
In addition to the above, there are alternative claims under Curaçao law available for minority shareholders who seek relief for alleged wrongful acts by a company, its directors or the majority shareholders, such as contesting the corporate resolutions of a company and requesting the majority shareholders to purchase the stake of the minority shareholders (uittreding). However, these alternative possibilities are very cumbersome and time-consuming and may not be instituted in respect of shares which are traded at a stock exchange.
Curacao law makes it more difficult for us to enter into a change of control transaction in which we are acquired and you are paid a premium on the shares that you hold in our company.
Our status as a Curacao company makes it more challenging (compared to Israel and various US states) to consummate a change of control transaction in which our company is acquired and our shareholders benefit economically via the payment of a premium on their shares relative to the then-current market price. Under Curacao law, there is no legal basis for a reverse triangular merger, a commonly-utilized transaction structure for the acquisition of publicly traded companies such as ours, in which shareholders receive cash. Curacao law allows for the acquisition of a publicly traded company such as ours for cash through a tender offer, provided that the offeror acquires at least 95% of the company's issued and outstanding share capital (which 95% threshold may be reduced under certain circumstances to 90% or 80% in case of a pre-wired asset sale), following which the offeror can purchase the remaining shares subject to court approval and possibly the exercise of certain dissenters' rights. Since Curacao law does not permit a cash merger and due to the challenges in obtaining such level of acceptance of the tender offer, a potential buyer might need to use different structures to acquire our company, e.g. migrating the company to another jurisdiction that allows for a cash merger as a means to acquire publicly traded companies; however, such process may be very time-consuming and could therefore prevent such a transaction from occurring. An additional option under Curacao law is a sale of assets, which is likely to be generally less efficient to our shareholders from a tax perspective. Each of the foregoing limitations or disadvantages of effecting an acquisition of our company or its assets in which shareholders realize a premium could furthermore adversely impact the market price of our shares in an ongoing manner.
|Item 4.||Information on the Company|
|A.||History and Development of the Company.|
Our legal and commercial name is Sapiens International Corporation N.V., and we were incorporated and registered in Curaçao on April 6, 1990. We are a public limited liability company and operate under the provisions of the Curaçao Commercial Code. In addition, we are registered as an Israeli company for tax purposes only. Our principal place of business is located at Azrieli Center, 26 Harokmim Street, Holon, 5885800, Israel, and our telephone number there is +972-3-790-2000. Sapiens Americas Corporation is our agent in the United States. Our World Wide Web address is www.sapiens.com. The information contained on the web site is not a part of this annual report. Except as described elsewhere in this annual report, we have not had any important events in the development of our business since January 1, 2016.
Capital Expenditures and Divestitures since January 1, 2014
In the third quarter of 2014, we acquired Knowledge Partners International LLC, or KPI, and the assets of The Decision Model, or TDM, for total consideration of $2.1 million in cash and 57,000 ordinary shares of Sapiens Decision, our subsidiary which holds all of the interests in KPI (representing 3% of Sapiens Decision’s issued and outstanding ordinary shares immediately prior to closing). In addition, one of the shareholders of KPI received 88,500 restricted shares of Sapiens Decision (of which 29,500 vested during each of the years ended December 31, 2015 and 2016) plus $450,000 in cash, subject to certain performance criteria. The agreements for the foregoing acquisitions included, among other things, certain put and call options relating to the Sapiens Decision shares issued upon consummation of the transaction and certain other benefits payable upon the occurrence of certain conditions. For further information, please see Note 1(d) to our consolidated financial statements included in Item 18 of this annual report.
In the second quarter of 2015, we acquired IBEXI Solutions Private Limited, or IBEXI, an India-based provider of insurance solutions and services, which services 18 insurers in both the P&C and L&P markets throughout Southeast Asia. The total purchase price in this acquisition was approximately $4.8 million, which we paid in cash at the closing, and which is subject to adjustment based on certain future criteria. For further information, please see Note 1(b) to our consolidated financial statements included in Item 18 of this annual report.
In the third quarter of 2015, we acquired Insseco, a Poland-based software and services provider for the insurance market, from Asseco Poland S.A., or Asseco, the indirect controlling shareholder of our company, which helped us to establish a strong presence in the Polish insurance market. We paid approximately $9.1 million in cash for Insseco, subject to upwards adjustment based on its achieving future revenue goals. For further information, please see Note 1(b) to our consolidated financial statements included in Item 18 of this annual report.
In the third quarter of 2016, we acquired Maximum Processing Inc., or MaxPro, a privately-held company headquartered in Bradenton, Florida, with offices in Garner, North Carolina. MaxPro is the provider of the Stingray System, a P&C insurance administration suite targeted towards the tier 4-5 U.S. market, as well as managing general agents, or MGAs, third-party administrators, or TPAs, and insurance brokers. We paid $4.3 million in cash for this acquisition (including $1.5 million that we placed in escrow at the closing). The seller also has the right to receive performance based payments of up to $2.6 million relating to achievements of revenue and profitability goals over three years (2016, 2017, 2018), which are also subject to continued employment. For further information, please see Note 1(b) to our consolidated financial statements included in Item 18 of this annual report.
In the third quarter of 2016, we acquired 4Sight Business Intelligence Inc., or 4Sight, a provider of business intelligence reports that is based in Austin, Texas. 4Sight offers insurance-specific business intelligence, or BI, solutions, including 4SightBI, a P&C-specific, off-the-shelf business intelligence (BI) product. We paid $330,000 in cash for this acquisition. In addition, the seller of 4Sight may receive additional performance-based payments of up to $2.6 million relating to achievements of revenue and profitability goals over three years (2016, 2017, 2018), which are also subject to continued employment. For further information, please see Note 1(b) to our consolidated financial statements included in Item 18 of this annual report.
In the first quarter of 2017, we acquired StoneRiver, a Denver, Colorado-based provider of a wide range of technology solutions and services to insurance carriers, agents, and broker-dealers, whose product groups encompass front-office, policy, claim, rating, underwriting, billing, and reinsurance solutions for all major business lines. The acquisition will enable us to expand the range of solutions and services that we offer in North America. We paid approximately $100 million in cash, subject to certain adjustments based on working capital, transaction expenses, unpaid debt and certain litigation matters. For further information, please see Note 17(a) to our consolidated financial statements included in Item 18 of this annual report.
Our principal capital expenditures during the last three years related mainly to the purchase of computer equipment and software for use by our subsidiaries. Our capital expenditures totaled approximately $1.5 million in 2014, $2.8 million in 2015 and $4.7 million in 2016.
We are a leading global provider of software solutions for the insurance industry, with a growing presence in the financial services sector. Our extensive expertise in the insurance industry is reflected in our innovative software suites, solutions and services for providers of property & casualty/general insurance (P&C), and life, annuities and pension (L&P) insurance. Our offerings enable our customers to effectively manage their core business functions, including policy administration, claims management and billing.
We also supply core record-keeping software solutions for retirement services and a complete offering for reinsurance providers. Additionally, we offer a decision management platform that enables our customers to quickly deploy business logic and comply with policies and regulations across their organizations and our digital suite facilitates an end-to-end, holistic and seamless digital experience for agents, customers and assorted insurance personnel.
Our solutions, which possess modern, modular architecture and are digital-ready, empower customers to respond to evolving market needs and regulatory changes, while improving the efficiency of their core operations. These enhancements increase revenues and reduce costs.
Our software solutions portfolio is comprised of:
|·||Life, Pension, Annuity and Retirement Solutions – comprehensive software solutions for the management of a diversified range of products for life, pension, annuity and retirement. Our portfolio includes Sapiens ALIS, Sapiens INSIGHT, Sapiens Retirement and Sapiens Closed Books.|
|·||Property and Casualty/General Insurance Solutions – a comprehensive software suite of solutions supporting a broad range of business lines, including personal, commercial and specialty lines, as well as a solution for the management of reinsurance contracts. Our portfolio includes Sapiens IDIT and Sapiens Reinsurance.|
|·||Sapiens DECISION – an enterprise-scale platform that enables institutions to centrally author, store and manage all organizational business logic. Organizations of all types – including banks, mortgage institutions and insurers – use it to track, verify and ensure that every decision is based on the most up-to-date rules and policies.|
|·||Sapiens Digital Suite – a digital transformation solution comprised of five integral offerings: advanced analytics, a portal for consumers and agents, personalized video capabilities, a customer engagement platform and cloud offerings and services. Together they offer an end-to-end, holistic and seamless digital experience for agents, customers and assorted insurance personnel.|
|·||Technology-Based Solutions – tailor-made solutions (unrelated to the insurance or financial services market) based on our eMerge platform, which provides end-to-end, modular business solutions, ensuring rapid time to market.|
Our services modernize and automate processes for insurance providers and financial institutions around the globe, helping to create greater organizational efficiencies, reduce costs and provide a better end user experience.
Our services include:
|·||Project delivery and implementation|
|·||Business and technical consulting related to our products|
|·||Project and program management|
|·||User acceptance testing|
|·||Hosting and managed services|
|·||Business transformation services|
Built on a solid foundation of insurance domain expertise, proven technology and a history of successful deployments, our organization assists clients in identifying and eliminating IT barriers to achieve business objectives.
For more information about our software solutions and services, please see “Sapiens’ Software Solutions” and “Sapiens’ Global Services” below in this section.
Our Marketplace and its Needs
Our Target Markets
We operate in a large market undergoing significant transformation. According to a research report published by Celent, a research and consulting firm (IT Spending in Insurance, a Global Perspective, 2016, by Jamie Macregor, Juan Mazzini, Karen Monks and KyongSun Kong, published on April 27, 2016), global IT spending by insurance companies is expected to grow from $184.9 billion in 2016 to $195.5 billion in 2017 and $208 billion in 2018. In particular, IT spending on external software and IT services, which was expected to total approximately $81 billion in 2016, is expected to increase to $87 billion by 2017, reflecting a 7.3% growth rate.
We believe that our current total addressable market for core insurance software solutions is approximately $30 billion, which we expect to grow as a result of insurance carriers’ and financial institutions’ need to spend on modern software solutions from external providers to address the operational challenges presented by the inefficiency of their legacy core systems. Legacy systems possess technical and functional limitations that adversely impact carriers’ ability to swiftly launch new, innovative products that satisfy their customers’ changing needs and preferences. By slowing down carriers’ business and geographic expansion, legacy systems create operational inefficiencies that are translated into increased business risk and financial costs.
Our customers are operating in a dynamic and changing regulatory environment. Often their legacy systems simply do not support new regulatory requirements and put carriers at risk of non-compliance. We believe these challenges will accelerate the shift from spending on legacy systems to new vendor software solutions, and the shift from reliance on in-house development to external vendors.
There is also a strong trend of shifting attention to the end-customer experience and activities, with a focus on digital operations. Many insurers are currently unable to provide the type of quality digital experience that their customers are already enjoying across most other verticals and customer satisfaction is only one of the many recognized benefits of going digital. This can only be supported via increased usage of data for decision-making, risk analysis, customer evaluation and rating, which requires a streamlined data flow and easy access to information from multiple sources.
Life, Pension, Annuity and Retirement Markets
Life, pension, annuity and retirement providers offer their customers a wide range of products for long-term savings, protection, pension and insurance. They assist policyholders with financial planning through life insurance, retirement, pension, medical and investment products. Their products can be classified into several areas, primarily investment and savings, risk and protection, pension and health-related products. These products can be targeted to individuals, as well as group- and employer-related products. Some insurance and financial services providers also offer retirement services products, particularly management of, and recordkeeping for, defined contribution retirement plans.
Retirement services offer employer-related, defined contribution plans that are the primary and fastest-growing retirement savings vehicles in the U.S., including nearly one-third of overall retirement assets. Financial services companies – including insurance companies, mutual funds, banks and third-party administrators (TPAs) – provide recordkeeping services for employer-related plans. Recordkeeping service providers commonly use legacy or in-house software solutions to manage their books.
Property & Casualty/General Insurance Market
Property and casualty insurance – also known as non-life insurance, or general insurance (GI) – protects policyholders against a range of losses on items of value. P&C insurance includes the personal segment, which is insurance coverage for individuals, with products such as motor, home, personal property and travel; the commercial segment, covering aspects of commercial activity, such as commercial property, car fleets and professional liability; and specialty lines, covering unique domains, such as marine, art and credit insurance.
Reinsurance is insurance that is purchased by an insurance company (“ceded reinsurance”) from another insurance company (“assumed reinsurance”) as a means of risk management. The reinsurer and the insurer enter into a reinsurance agreement (referred to as “contract” or “treaty”), which details the conditions upon which the reinsurer would pay the insurer’s losses. The reinsurer is paid a reinsurance premium by the insurer and the insurer issues insurance policies to its own policyholders. The insurer must maintain an accurate system of records to track its reinsurance contracts and treaties, to avoid claims leakage.
Financial Services Market for Decision Management
Increasing competition, regulatory burden, customer experience expectations, the proliferation of digital and product innovation requirements are necessitating a shift in thinking and approach across the financial services market. By replacing conventional policy and process management with the growing discipline known as “decision management,” financial institutions are bridging the gap between business and IT by enabling business users to rapidly frame requirements in formal business models that can be easily understood by all stakeholders.
The decision management processes in financial services affects overall corporate performance, including its impact on customers and competitors. Decision management systems are a key performance component of every financial services organization, as they help the organization define, avoid and hedge financial risk.
Needs of our Target Markets
Large financial organizations must constantly invest in their IT systems to respond to key market drivers.
They require the ability to:
|·||Satisfy today’s sophisticated, tech-savvy and demanding customers – who expect the type of instant, personalized service they enjoy via Facebook or Amazon – via digitalization and innovative initiatives.|
|·||Provide innovative business models, based on technology capabilities and digital operation (such as a portal, a web-based acquisition process, advanced analytics, customer engagement platforms and the usage of data sources – such as wearables, the Internet of Things (IoT) and robo-advice.|
|·||Respond to complex and evolving regulatory standards, such as Solvency II, Dodd-Frank legislation, DGPR, etc.|
|·||Support internal customers’ growth and operations. This includes reducing the time to market of new products, expanding into new geographies, reducing costs and streamlining operations.|
Specific Needs of the Insurance and Retirement Services Markets
The insurance market is a large, complex and highly regulated environment. Insurance carriers operate in a super-competitive and quickly evolving market, which necessitates differentiating their value propositions. Additionally, carriers operate under a rigid regulatory regime that demands fast compliance.
To efficiently manage their operations, insurance carriers require IT platforms that enable rapid introduction of changes via configurable, user-driven activities, integration with internal and external systems, control and auditing of internal employees’ work, support for omni-channel distribution and clear visibility into the carrier’s business operations, through streamlining and intelligent usage of data.
Insurance carriers are experiencing substantial operational challenges due to the inefficiency of their legacy policy administration systems and their lack of digitalization. These legacy systems, which include both technical and functional limitations, acutely impact carriers’ ability to cope with growing challenges, such as the need for innovation, the shift of power to the consumer, and the dynamic and constantly changing regulatory environment.
We believe the following are key considerations for insurance carriers when they think about upgrading their legacy systems:
· Dynamic business environment with constantly changing regulations – Many insurance carriers still use outdated legacy systems that are costly and time-consuming to modify or upgrade. This has prevented insurance carriers from innovating and growing. Carriers who use legacy systems may find that it is difficult for them to modify existing products, introduce new products and reach untapped market segments. Varied and frequently changing global regulatory requirements require specialized data and business rules, which makes change implementation particularly challenging.
· Change in end-consumers’ behavior and the shift of power to consumers – Insurance carriers must adapt rapidly to the shifting needs and behaviors of consumers, including the types and terms of insurance products offered, and how consumers access information. Insurance carriers require systems with integration capability and support for multi-channel distribution, so they can reach their clients’ customers and partners using multiple methods, including social media, across devices.
· A need to improve operational efficiency and reduce total cost of ownership – We believe that a majority of insurance carriers are still using inefficient and outdated processes that do not automate operations and workflows, and thus don’t offer efficient process management. Many of these processes may have high error rates. Additionally, the ongoing maintenance of legacy systems is expensive and technically difficult. A specialized IT staff with the requisite skills and experience needed to maintain these systems is difficult to find or replace. Insurers seek systems that are modern, digital, automated, efficient and easy to maintain, and can lower costs over the long term.
· Increasing global and multi-national operation – A rising number of insurers are accelerating their growth initiatives through global acquisitions. These insurers seek sole providers who can deliver solutions that will be used across markets, combining the support of local regulatory requirements and specific customer needs, while driving a generic corporate business approach and strategy across the globe, reducing costs and overhead.
· Going digital – Digitalization holds significant potential for financial services institutions and insurers, but only if they manage to efficiently digitalize their operations, support multi-channel distribution and ensure that agents and customers are able to access real-time, accurate data at any time and from anywhere – including tablets and other mobile devices.
Business Decision Management Market Needs
Many large organizations, particularly in the financial services market, must comply with complex regulations. They operate in highly competitive markets that require quick responses. Business logic drives most of the financial services transactions and is the backbone of an organization’s policies and strategies, and its ability to successfully operate.
To operate efficiently, business owners must assume ownership of the business logic and possess the ability to define and modify it; standardize it; and reuse it across the organization. Today, business logic is defined by business owners and compliance officers, but IT departments translate the requirements into code. This process raises several key challenges: the result does not always accurately reflect the business requirements; the new requirements might conflict with, or override, previous requirements; and the entire process is not fully audited. These gaps often create an inefficient and risk-exposed organization.
Sapiens’ Software Solutions
We are a leading global provider of software solutions for the insurance industry with a growing presence in the financial services sector. By enabling our customers to digitize and be more agile in the face of new and changing business environments, we help them take advantage of powerful current trends – such as the Internet of Things, social media, ride sharing, customer engagement, robo-advice, etc. – while simultaneously reducing IT costs.
We offer our insurance customers a range of packaged software solutions that are:
|·||Comprehensive and function-rich, supporting generic insurance standards, regulations and processes by providing field-proven functionality and best practices.|
|·||Customizable, to easily match our customers’ specific business requirements. Our flexible architecture and configurable structure allows quick functionality augmentation that permits our platform to be used across different markets, unique business requirements and regulatory regimes, utilizing our knowledge and extensive insurance best practices.|
|·||Service-oriented architecture (SOA) based, to provide easy integration to any external application under any technology, allowing streamlined connectivity to all satellite applications and enhancing the digital experience and omni-channel distribution (while maintaining total platform independence and system reliability).|
|·||Digital, revealing their history and anticipating their future needs, while facilitating easy communication across preferred interaction channels and devices.|
|·||Component-based and scalable, allowing our customers to deploy the solutions in a phased and modular approach, reducing risk and harm to the business, while supporting the growth plans and cost efficiency of the organization.|
Our packaged software solutions enable:
|·||Rapid deployment of new insurance products, via configurable software, which creates a competitive advantage in all of the insurance markets we serve.|
|·||Improvement of operational efficiency and reduction of risk, by providing full insurance process automation, with configurable workflows, audit and control, streamlined insurance practices and simple integration and maintenance.|
|·||Reduction of overhead for IT maintenance through easy-to-integrate solutions with flexible and modern architecture, resulting in lower costs for ongoing maintenance, modifications, additions and integration.|
|·||Enhanced omni-channel distribution and focus on the customers, through event-driven architecture, a proactive client management approach, rapid access to all levels of data and a holistic view of clients and distributors.|
|·||Various deployment models, from an on-premise deployment approach, to cloud and hosted solutions.|
|·||Support of digitalization, which holds massive potential for insurers and financial services institutions, if they manage to efficiently digitalize their operations, support omni-channel distribution and ensure that agents and customers are able to access real-time, accurate data at any time and from anywhere – including tablets and mobile devices.|
Sapiens Life, Pension & Annuity Solutions
Sapiens ALIS for Life, Pension and Annuities
Sapiens ALIS is a comprehensive software solution for individual and group insurance products. It provides comprehensive support for the complete policy lifecycle of all life insurance products – from quotation and illustrations; to underwriting, billing and servicing; through claims management and exit processing.
Sapiens ALIS supports a wide range of insurance product lines across multiple territories, including:
|·||Individual and group life, investment and savings|
|·||Individual and group protection, and risk products|
|·||Individual and group pension|
Sapiens ALIS is a modular system that includes all the functional components necessary for insurers to manage their business. Insurance carriers can manage their entire core business on a single platform and integrate Sapiens ALIS with other systems for the completion of a specific activity or domain.
Sapiens ALIS integrates all of the following functions into one solution:
|·||Sales, quotation and illustration|
|·||Billing, collection and payment management|
|·||Agency and commission|
|·||CRM and customer management|
|·||Workflow and diary|
|·||Compliance and calculation engine|
|·||Insurance product manufacturing|
On top of the functional modules, Sapiens ALIS provides a set of digital capabilities to its customers, including an advanced analytics solution, a consumer and agent portal, personalized video capabilities and a customer engagement platform These capabilities increase customer touch-points and generate actionable insights. Sapiens has partnered with Microsoft Azure to offer its Sapiens ALIS policy administration system and accompanying services over private and public clouds.
Sapiens Retirement Services
Leveraging assets we have built from our Sapiens ALIS offering, we have developed Sapiens Retirement, a modern, end-to-end, packaged software solution that manages record-keeping for defined-contribution recordkeeping providers.
Sapiens Retirement Services Platform is a next-generation, defined contribution platform that enables recordkeepers to secure and retain profitable plans by offering the efficiency, flexibility and end-to-end governance required for success in today’s market. Designed by leading industry experts, Sapiens Retirement Services supports a wide range of plan types – 401(k), 403(b) and 457 – from micro to mega plans, and the associated plan variations, including ERISA, Non-ERISA, Safe Harbor, Taft Hartley and others.
Sapiens Closed Books
Sapiens Closed Books is a solution for life and pension insurance companies that enables them to efficiently and more effectively administer policies and claims relating to their legacy portfolio and closed books business (products that are no longer open to new business, but must still be administered).
An industry leading and proven system, Sapiens Closed Books was designed to deliver solutions to legacy portfolio challenges, while significantly cutting the costs that are commonly associated with legacy platforms. Sapiens Closed Books provides a full, end-to-end legacy portfolio-focused system that is capable of dealing with missing data, old legislation and a wide range of product types.
The Sapiens Closed Books model ensures that benefits are realized in a controlled and low risk manner, via best practices and proven industry experience.
Sapiens INSIGHT is offered uniquely in Israel, enabling life and pension insurance providers to handle a wide range of activities and regulations that are unique to the Israeli market.
Sapiens Property & Casualty/General Insurance Solutions
Sapiens IDIT is a component-based software solution, addressing the specific needs of general insurance carriers for traditional insurance, direct insurance, bancassurance and brokers markets, primarily in EMEA and Asia-Pacific.
It supports a broad range of general, personal and commercial lines of business, including:
|·||Personal lines – motor, personal property and homeowner, yacht, travel, medical insurance, liability, professional indemnity, etc.|
|·||Commercial lines – fleet insurance, marine, cargo, engineering, real estate and commercial building, small and large commercial risks, etc.|
|·||Specialty lines – agriculture, credit insurance, art insurance, etc.|
Sapiens IDIT integrates multiple front office and back office processes, including insurance product design, the quote and buy process, policy administration, underwriting, call center, and remote users and partners, backed by fully secured internet-based capabilities.
By providing a full set of components, Sapiens IDIT supports insurance carriers’ core operations lifecycle – from inception to renewal, and claims. This includes:
|·||Billing and collection|
Sapiens IDIT includes modular software components that can be customized to match specific insurance business requirements, while providing pre-configured functionality, including:
|·||Billing and collection|
|·||Customer Relationship Management (CRM)|
On top of the functional modules, Sapiens IDIT provides a set of digital solutions and services to its customers, including an advanced analytics solution, a consumer and agent portal, personalized video capabilities and cloud offerings and services. These capabilities accelerate and automate responses, and reduce costs.
Sapiens Stingray is a modular browser-based, property and casualty policy administration solution for Policy (quoting, rating, issuance), Billing, Claims and Reinsurance administration. Sapiens Stingray includes complete customer and agent portals as well as an imaging system. Additionally, Stingray has statistical bureau reporting, DMV, Credit Card, General Ledger, Comparative Raters, CLUE, Business Intelligence, reporting and many other third party insurance related interfaces.
Sapiens Reinsurance is a comprehensive business and accounting solution designed to support the entire range of reinsurance contracts and activities, both ceded and assumed, for all lines of business. This software product provides both insurers and reinsurers superior handling of all reinsurance activities and in-depth accounting functionality on a single platform. By incorporating fully automated functions adapted conveniently for its customers’ business procedures, Sapiens Reinsurance provides flexible and full financial control of its customers’ reinsurance processes, including full support for all auditing requirements and statutory compliance.
Sapiens Reinsurance offers end-to-end processing, including:
|·||Set-up and definition of the reinsurance program and comprehensive transaction processing for both cession and assumed contracts|
|·||Automated production of all periodic statements, billings, bordereaux and accounts for all parties – reinsurers, brokers and ceding companies|
|·||All-inclusive financial accounting module for current accounts management, P&L and balance sheet figures, and comprehensive support for general ledger accounts|
|·||Complete audit trail and tracking capability of all activities, transactions and business processes|
Sapiens Insight for P&C is a software solution used by carriers that works on IBM System z (mainframe) and System i platforms. Insight for P&C has been customized to meet specific business demands at the insurer level and regulatory needs at the state level.
Sapiens Digital Suite
Sapiens INTELLIGENCE is a modular, highly innovative business intelligence solution specifically designed for the insurance market. Based on the advanced technology of SAP’s analytics platform, Sapiens INTELLIGENCE is an important component of the industry-leading Sapiens’ portfolio and is comprised of two integral elements: SmartStore and InfoMaster.
SmartStore is a centralized data hub for all insurance reporting and analytics. It gathers data from Sapiens’ operational repository and intelligently transforms it into an insurance-domain set of business logical models, specifically designed for complex and in-depth analytics.
InfoMaster is Sapiens’ set of analytical applications, offering a wide range of data visualization and analysis capabilities through reporting, dashboards and data discovery. Incorporating Sapiens’ best practices and three decades of leading experience, Sapiens InfoMaster helps insurers achieve greater efficiency and begin reaping the benefits of analytics immediately.
The Sapiens PORTAL is pre-integrated with Sapiens ALIS and Sapiens IDIT. In addition to enjoying the myriad benefits provided by Sapiens ALIS and Sapiens IDIT, insurers can deploy a portal that will transform their online sales, customer and agent experience.
The Sapiens PORTAL was specifically designed to address insurers’ needs, guided by Sapiens’ three decades of industry experience. Two key segments are addressed by the Sapiens PORTAL:
The PORTAL for Consumers is a direct-to-consumer application that enables customers to buy policies, view the status of their policies and accounts, issue claims and conduct many other transactions that save insurers time and reduce costs. Insurers can leverage their investment by offering customers a unique, real-time customer experience tailored to today’s digital natives.
The PORTAL for Agents empowers the agent with full lifecycle enablement, including the ability to manage their pipeline, sell policies to their consumers and provide top-level customer service in real time. They can also obtain a holistic view of their business performance overall and benefit from full access to all their remunerations, payments, commission transactions and statements. Equipping agents with self-service tools that make their lives easier and help them better serve their customers will increase agent efficiency and satisfaction.
Sapiens Business Decision Management Solutions
Sapiens DECISION is a business decision management solution that consistently enforces business logic across all enterprise applications. Organizations use it to track, verify and ensure that every decision is based on the most up-to-date rules and policies. The solution is powered by The Decision Model®, a widely adopted decision management methodology, for which we own a number of patents.
Organizations are undergoing a paradigm shift in the way they approach change, by replacing conventional policy and process management with a growing discipline called “decision management.” Decision management bridges the gap between business and IT, by enabling business users to rapidly frame requirements in formal business models that can be easily understood by all stakeholders. This ensures that the business logic is complete, internally consistent and accurate, and does not replicate existing logic.
Sapiens DECISION allows the reusability and governance of business logic across all business divisions and software applications, using any rules engine or business process management system, and integrating seamlessly with the BRM or BPM system that the organization has in place.
Some of the key benefits for organizations that use Sapiens DECISION are:
|·||Reduced risk, by assessing the impact of any change (competitive, strategy, regulatory, etc.) and allowing users to simply and quickly design new and sustainable models to meet evolving business requirements.|
|·||Limited costs and complexity, by centralizing the development and dissemination of institutional business logic, which improves efficiency.|
|·||Improved visibility and true governance, by putting business users in full control of institutional business logic and enabling them to trace every policy and rule back to its motivation and documentation.|
|·||Establishment of a “single point of truth,” by providing business and IT users a centralized business logic repository.|
We are currently focusing on the development and marketing of Sapiens DECISION in the financial services market in North America and Western Europe, and we are building best practices to be used primarily by mortgage, retail and investment banking where the scale and complexity of operations requires enterprise-grade technology that can easily be adapted as policies and business strategies rapidly evolve. We also intend to develop and market Sapiens DECISION for the insurance industry and leverage our industry knowledge and close relationships with our existing customers and partners.
Sapiens eMerge is a rules-based, model-driven architecture that enables the creation of tailor-made, mission-critical core enterprise applications with little or no coding. Our technology is intended to allow customers to meet complex and unique requirements using a robust development platform. For example, we perform proxy porting for our customers in an efficient, cost effective manner with Sapiens eMerge.
Sapiens’ Global Services
Our services modernize and automate processes for insurance providers and financial institutions around the globe, helping to create greater organizational efficiencies, reduce costs and provide a better end-user experience. Built on a solid foundation of insurance domain expertise, proven technology and a heritage of successful deployments, we assist clients in identifying and eliminating IT barriers to achieve business objectives. Benefits include:
|·||Project delivery experience – more than 30 years of field-proven project delivery of core system solutions, based on best practices and accumulated experience.|
|·||System integration – we help our customers deploy modern solutions, while expertly integrating these solutions with their legacy environments that must be supported.|
|·||Global presence – insurance and technology domain experts are available worldwide to provide professional services.|
Our implementation teams assist customers in building implementation plans, integrating our software solutions with their existing systems, and deploying specific requirements unique to each customer and installation.
Our service teams possess strong technology skills and industry expertise. The level of service and business understanding they provide contributes to the long term success of our customers. This helps us develop strategic relationships with our customers, enhances information exchange and deepens our understanding of the needs of companies within the industry.
Through our service teams, we provide a wide scope of services and consultancy around our core solutions, both in the initial project implementation stage, as well as ongoing additional services. Many of our customers also use our services and expertise to assist them with various aspects of daily maintenance, ongoing system administration and the addition of new solution enhancements.
Such services include:
|·||Adding new lines of business and functional coverage to existing solutions running in production|
|·||Ongoing support services for managing and administering the solutions|
|·||Creating new functionalities per specific requirements of our customers|
|·||Assisting with compliance for new regulations and legal requirements|
In addition, most of our clients elect to enter into an ongoing maintenance and support contract with us. The terms of such a contract are usually twelve months and are renewed every year. A maintenance contract entitles the customer to technology upgrades (when made generally available) and technical support. We also offer introductory and advanced classes and training programs available at our offices and customer sites.
We partner with several system integration and consulting firms to achieve scalable, cost-effective implementations for our customers. We have developed an efficient, repeatable methodology that is closely aligned with the unique capabilities of our solutions.
Comprehensive suitesof high-end, crucial solutions for insurance. We offer end-to-end solutions for both the P&C and L&P/L&A markets, supporting most sub-segments of these markets and the complete lifecycle of product lines. Our software supports and enables our customers’ core insurance business processes throughout the full lifecycle of administration within an organization, including policy administration, billing and claims, which we believe is a unique offering among software solution providers. In addition, our solutions for the retirement market support core record-keeping for retirement services providers, which is fundamental to their operations. Built for global and multi-national operations, our solutions are used in a variety of international regulatory, language and currency environments. Our digital suite is pre-integrated with Sapiens IDIT and Sapiens ALIS.
Innovative solutions with leading functionality and technology. Our solutions are based on advanced, modern architectures that are specifically designed to satisfy our customers’ needs. These solutions are integrated, modular and component-based, and include scalable product suites supporting various lines of business. By using our solutions, carriers can support new sales channels, including mobile and social, reduce time to market for new product launches, and lower total cost of ownership. Additionally, we significantly invest in research and development to ensure that our products employ new technology, are compatible with the needs of our clients and are easy to use. As a result, our products maintain a leadership position, as recognized by top industry analysts, such as Celent and Ovum, for their levels of both technology and functionality.
One-stop-shop across products and services. In addition to our market-leading products across P&C and L&P, we possess consulting and implementation capabilities, which we use to customize our products and design the solution that best meets our customers’ requirements. We believe that our customers do business with us not only because of our leading products, but also due to our complementary service offerings, which enhance our products and enable clients to maximize the value derived from our solutions. We believe that this approach lowers the risks for our clients, as they transition to a new system, and at the same time provides them with the functionality they desire. For example, we consult with each of our customers to determine their specific needs and then enhance our core solution and customize the appropriate interfaces. Through these interactions and experiences, we foster long-term relationships with our customers, which provide opportunities to deliver a wide range of our products and services as requirements change over time.
Strong, diverse and stable customer base. We currently serve more than 200 customers globally, including some of the world’s largest global insurance carriers and financial institutions. Our customer base is diversified across insurance providers, including life, pensions and annuities; property and casualty insurers; and retirement services providers. We have been able to successfully maintain these customers due to our broad product portfolio geared toward addressing the needs of these industries. In addition, our business decision management platform is applicable across the financial services industry, including a wide range of financial institutions, and offers an opportunity for further diversification in other markets. Geographically, we derived 34.4%, 21.7%, 16.4%, 13.5% and 14.0% of our revenue from North America, the United Kingdom, the rest of Europe, Israel and the Asia-Pacific region, respectively, in the year ended December 31, 2016, and 33.0%, 22.9%, 17.7%, 15.3% and 11.0%, respectively, in the year ended December 31, 2015.
Long-term relationships with customers. Our products are at the core of our customers’ businesses, which ensures that our customers continue to use and co-invest in our products, providing us with long-term relationships that result in revenue stability. Installing a new core system is a major undertaking for insurance carriers that involves extended pre-production work and entails a comprehensive integration and implementation effort that is offered as part of our services. Many of our customer relationships have been in place for more than 10 years and we have benefited from recurring revenues as customers request support, upgrades and enhancements for our systems. In addition, we benefit from these relationships, due to our ability to market complementary solutions to our loyal customer base.
Proven management team. Our management team has extensive experience in the insurance and financial services industries and we have been able to achieve our business and development objectives to date. Management has also been successful in retaining key personnel from the companies we acquired,enabling us to benefit from their experience and knowledge of the acquired products and technology. Our management team possesses a variety of skills in product development, business development, sales, marketing, technology and finance, as well as a unique knowledge of the financial services industry. We have maximized contributions from our hard working, talented and innovative employees.
Leveraging our offerings, geographic presence and experienced management team, our goal is to further expand our presence in the markets in which we operate and further enhance our leadership in the global market. Our growth strategy is solidly based on both existing and new customers, and will include mergers and acquisitions, when applicable, to accelerate our growth. We plan to achieve our goals by focusing on the following principles:
Continue to innovate and extend the leadership of our product offerings. Due to past investments, we have become a leader in providing software offerings to the insurance industry. We plan to continue to invest in research and development to enhance our software platform solutions and to ensure they remain leading products, in terms of functionality and technology. We believe our focus on innovation, combined with our industry expertise, will enable us to improve our existing offerings and allow us to produce new solutions for the benefit of our customers and partners.
Leverage our global footprint to offer our complete solutions suite. We intend to broaden our existing offering of solutions to enhance our presence in the geographies in which we currently operate. In particular, we believe that there is considerable opportunity to commence and grow sales of our P&C product suite in the United States and Canada, and also to expand the market reach of our business decision management platform into Europe and the Asia Pacific region. Additionally, we plan to market our current suite of solutions to other countries in Europe in order to continue to generate revenue on existing products in new geographies.
Mergers and Acquisitions. Our M&A approach facilitates our growth strategy. We seek to identify new growth markets to penetrate via acquisition of local offices and customer bases. In addition, we aim to enhance our product portfolio with complementary solutions that will help our customers excel. We believe that our acquisition of local customer bases and expertise will accelerate our market penetration in growth geographies. We plan to take advantage of our recent acquisition of StoneRiver to strengthen our presence in North America, expand our product portfolio and accelerate our footprint in the U.S. Property & Casualty market.
Capture adjacencies and new opportunities. In order to maximize the value of our current offerings and leverage our long-term relationships with customers, we plan to feature and promote our digital suite to enhance our presence in the insurance market. To date, our core insurance software solutions account for approximately 80% of our business, while our technology platforms account for approximately 20% of our business. We believe our plan to remain vertically focused, while concentrating on our customers’ ancillary needs, will strengthen our customer relationships. Additionally, we plan to focus on penetrating the financial services market with our business decision management platform to aid financial services organizations in the management, design and simulation of the business logic behind operations. Our business decision management platform can be geared toward compliance in a wide variety of organizations to facilitate streamlined and efficient regulatory compliance.
Invest in sales and marketing. We plan to strengthen our sales and marketing teams by working with and training sales professionals with experience in the insurance industry, or with connections to new or existing customers, enhancing market-awareness of our brand and solutions. We believe that the strength of our core solutions, the experience of our sales and marketing team, and our established and growing customer base create a significant opportunity to provide new and complementary solutions that address the ongoing needs of our customers.
We operate in two main markets – insurance and the broader financial services sector – with different competitive landscapes.
The market for core software solutions for the insurance industry is highly competitive and characterized by rapidly changing technologies, evolving industry standards and customer requirements, and frequent innovations.
The market for business decision management is a relatively new and innovative market, and as such it is still early to accurately identify competition.
Competitive Landscape for our Insurance Software Solutions
Our competitors in the insurance software solutions market differ from us based on size, geography and lines of business. Some of our competitors offer a full suite, while others offer only one module; some operate in specific (domestic) geographies, while others operate on a global basis. And delivery models vary, with some competitors keeping delivery in-house, using IT outsourcing (ITO) or business process outsourcing (BPO).
The insurance software solutions market is highly competitive and demanding. Maintaining a leading position is challenging, because it requires:
|·||Development of new core insurance solutions, which necessitates a heavy R&D investment and an in-depth knowledge of complex insurance environments|
|·||Technology innovation, to attract new customers|
|·||A global presence and the ability to support global insurance operations|
|·||Satisfaction of regulatory requirements, which can be burdensome and require specific IT solutions|
|·||Continued support and development of the solutions entails a critical mass of customers that support an ongoing R&D investment|
|·||Know-how of insurance system requirements and an ability to bridge between new systems and legacy technologies|
The complex requirements of this market create a high barrier to entry for new players. As for existing players, these requirements have led to a marked increase in M&A transactions in the insurance software solutions sector, since small, local vendors have not been able to sustain growth without continuing to fund their R&D departments and follow the globalization trend of their customers.
We believe we are well-positioned to leverage our modern solutions, customer base and global presence to compete in this market and meet its challenges. In addition, our accumulated experience and expert teams allow us to provide a comprehensive response to the IT challenges of this market.
Different types of competitors include:
|·||Global software providers with their own IP.|
|·||Local/domestic software vendors with their own IP, operating in a designated geographic market and/or within a designated segment of the insurance industry.|
|·||BPO providers who offer end-to-end outsourcing of insurance carriers business, including core software administration (although BPO providers want to buy comprehensive software platforms to serve as part of the BPO proposition from vendors and may seek to purchase our solutions for this purpose).|
|·||Internal IT departments, who often prefer to develop solutions in-house.|
We differentiate ourselves from our competitors via the following key factors:
|·||We offer innovative and modern software solutions, with rich functionality and advanced, intuitive user interfaces.|
|·||We use model-driven architecture that allows rapid deployment of the system, while reducing total cost of ownership.|
|·||Our solutions are built using an architecture that allows customers to implement the full solution or components, and readily integrate the solution or individual components into their existing IT landscape.|
|·||We recognize technology trends and invest in adjusting our solutions to meet this rapid pace.|
|·||We are able to fund R&D investment and maintain the competitive advantage of our products due to our large and growing customer base and financial stability.|
|·||Our delivery methodology is based on extensive insurance industry experience and cooperation with large insurance companies globally.|
|·||We leverage our proven track record of successful delivery to help our customers deploy our modern solutions, while integrating with their legacy environment (that must remain supported).|
Competitive Landscape for Business Decision Management Solutions
Sapiens DECISION is a pioneer in this disruptive market landscape. Since the introduction of our innovative approach to enterprise architecture to the market, we have identified only a small number of potential competitors.
We differentiate ourselves from our potential competitors through the following key factors:
|·||We believe that Sapiens DECISION is the only solution that offers a true separation of the business logic in a decision management system for large enterprises – and that is currently generally available and already in production.|
|·||Sapiens DECISION is unique in its proven ability to support complex environments, with full audit trail and governance that is crucial for large financial services organizations.|
|·||We understand complex environments where DECISION is deployed due to our experience delivering complex, mission-critical solutions|
Geographical Scope of Our Operations
For a breakdown of the geographical regions in which our revenues are generated and the relative amounts of such revenues over the course of the last three fiscal years, please see “Item 5—Operating and Financial Review and Prospects—A. Operating Results—Revenue by geographical region” below in this annual report.
Sales and Marketing
Our main sales channel is direct sales, with a small portion of partner sales. Our sales team is dispersed across our regional offices in North America, the United Kingdom, Belgium, France, Israel, Australia, India, Poland and Japan. The direct sales force is geared to large organizations within the insurance and financial services industry.
In 2016, we continued to significantly invest in our target regions – North America, UK and Europe – and our sales, presales, domain experts and marketing personnel. We anticipate that our sales team will leverage their proximity to customers and prospective clients to drive more business, and offer our services across our target markets.
Our account managers were focused on building ongoing relationships with existing customers during the past year, to maintain a high level of customer satisfaction and identify up-selling opportunities within these organizations. We believe that a high level of post-contract customer support is important to our continued success.
As part of our sales process, we typically sell a package that includes license, implementation, customization and integration services, and training services. All of our clients for whom we have deployed our solutions elect to enter into an ongoing maintenance and support contract with us. We aim to expand our distribution model to include more channel partners and system integrators, but we intend to maintain the direct sales model as our prime distribution channel.
We attend major industry trade shows to improve our visibility and our market recognition. Additionally, we host client conferences – such as our annual Sapiens Client Conference, which took place in Gouvieux, France in October 2015 and in North Atlanta, U.S. in September 2016 – that are intended to strengthen our relationships with our existing customer base. We continue investing in our web presence, we created a new blog channel in 2014 (“Sapiens Spotlight”) and totally refreshed and redesigned our website. We also invest in our working relationships and advisory services within the global industry-analyst community.
We work together with standards providers – such as ACORD, MISMO and SPARK – to further enrich our offerings and provide our customers with comprehensive and innovative solutions that address the entire breadth of their business needs.
We rely on a combination of contractual provisions and intellectual property law to protect our proprietary technology. We believe that due to the dynamic nature of the computer and software industries, copyright protection is less significant than factors such as the knowledge and experience of our management and personnel, the frequency of product enhancements and the timeliness and quality of our support services.
We seek to protect the source code of our products as trade secret information and as unpublished copyright work, although in some cases, we agree to place our source code into escrow. We also rely on security and copy protection features in our proprietary software. We distribute our products under software license agreements that grant customers a personal, non-transferable license to use our products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products. In addition, we attempt to protect trade secrets and other proprietary information through agreements with employees, consultants and distributors.
Our trademark rights include rights associated with our use of our trademarks, and rights obtained by registration of our trademarks. Our use and registration of our trademarks do not ensure that we have superior rights to others that may have registered or used identical or related marks on related goods or services. We have registrations for the mark “Sapiens” in USA, Benelux, Germany, Italy Switzerland and Israel, the name “RapidSure” in the U.S. and Canada, and the names ALIS, E-ALIS, CORE-ALIS and certain other related marks, as well as the ALIS design in the USA and Israel. The initial terms of protection for our registered trademarks range from 10 to 20 years and are renewable thereafter.
In the third quarter of 2014, we acquired KPI and the assets of The Decision Model, or TDM, which included certain intellectual property rights, including a patent held by TDM and a patent application for The Event Model, or TEM. Both TDM and TEM relate to decision management methodology that was invented by Larry Goldberg and Barbara Von Halle (in the case of TEM, IBM was a co-inventor as well). See “Item 4.A. History and Development of the Company– Capital Expenditures and Divestitures since January 1, 2014” and “Item 4.B. Business Overview— Sapiens Business Decision Management Solutions” for further information.
The global financial services industry is subject to significant government regulation, which is constantly changing. Financial services companies must comply with regulations, such as the Sarbanes-Oxley Act, Solvency II, Retail Distribution Review (known as RDR) in the United Kingdom, the Dodd-Frank Act and other directives regarding transparency. In addition, many individual countries have increased supervision over financial services operating in their market.
For example, regulators in Europe have been very active, motivated by past financial crises and the need for pension restructuring. Distribution of policies is being optimized with the increasing use of Bank Assurance (selling of insurance through a bank’s established distribution channels), supermarkets and kiosks (insurance stands). Increased activity – such as that occurring in Europe – would generally tend to have a positive impact on the demand for our software solutions and services. Nevertheless, insurers are cautiously approaching spending increases, and while many companies have not taken proactive steps to replace their software solutions in recent years, many of them are now looking for innovative, modern replacements to meet the regulatory changes.
For further information, please see Item 5.D below, “Trend Information.”
Sapiens International Corporation N.V., or Sapiens N.V., is the parent company of the Sapiens group of companies. Our significant subsidiaries are as follows:
Sapiens International Corporation B.V., or Sapiens B.V.: incorporated in the Netherlands and 100% owned by Sapiens N.V.
Unless otherwise indicated, the other subsidiaries of Sapiens listed below are 100% owned by Sapiens B.V.:
Sapiens Israel Software Systems Ltd.: incorporated in Israel
Sapiens Technologies (1982) Ltd.: incorporated in Israel
Sapiens Americas Corporation: incorporated in New York, U.S.
Sapiens North America Inc.: incorporated in Ontario, Canada.
Sapiens (UK) Limited: incorporated in England
Sapiens France S.A.S.: incorporated in France
Sapiens Deutschland GmbH: incorporated in Germany (owned 100% by Sapiens Technologies (1982) Ltd.)
Sapiens Japan Co.: incorporated in Japan and 90% owned by Sapiens B.V.
Sapiens Software Solution (IDIT) Ltd., or Sapiens IDIT: incorporated in Israel (owned 100% by Sapiens Technologies (1982) Ltd.)
IDIT Europe N.V.: incorporated in Belgium (owned 100% by Sapiens IDIT)
IDIT APAC PTY. Limited: incorporated in NSW, Australia (owned 100% by Sapiens IDIT)
Sapiens (Singapore) Insurance Solution.: incorporated in Singapore (owned 100% by Sapiens IDIT)
Sapiens Software Solution (Life and Pension) Ltd., or Sapiens L&P: incorporated in Israel (owned 100% by Sapiens Technologies (1982) Ltd.)
Sapiens (UK) Insurance Software Solutions Limited: incorporated in the UK (owned 100% by Sapiens L&P))
Sapiens NA Insurance Solutions Inc.: incorporated in Delaware, US (owned 100% by Sapiens L&P)
Formula Insurance Solutions (FIS) France: incorporated in France (owned 100% by Sapiens (UK) Insurance Software Solutions Limited)
FIS- AU Pty Limited: incorporated in Australia (owned 100% by Sapiens (UK) Insurance Software Solutions Limited.)
Neuralmatic Ltd.: incorporated in Israel (owned 66% by Sapiens L&P)
Sapiens Software Solutions (Decision) Ltd., or Sapiens Decision (owned 95.7% by Sapiens Technologies (1982) Ltd.)
Sapiens Decision NA Inc. (owned 100% by Sapiens Decision)
Knowledge Partners International LLC, or KPI (owned 100% by Sapiens Decision NA Inc.)
Sapiens (UK) Decision Limited (owned 100% by KPI)
Ibexi Solutions Private Limited: incorporated in India (owned 95% by Sapiens Technologies (1982) Ltd)
Ibexi Solutions Pte Limited: incorporated in Singapore (owned 100% by Ibexi Solutions Private Limited)
Ibexi Solutions FZE: incorporated in Dubai (owned 100% by Ibexi Solutions Private Limited)
Sapiens Software Solutions (Poland) Sp. z o.o. (formerly Insseco Sp. z o.o.): incorporated in Poland (owned 100% by Sapiens Technologies (1982) Ltd)
Maximum Processing Inc., incorporated in Florida (owned 100% by Sapiens Americas Corporation)
4Sight Business Intelligence Inc., incorporated in Texas (owned 100% by Sapiens Americas Corporation)
StoneRiver, Inc, incorporated in Delaware (owned 100% by Sapiens Americas Corporation)
Sapiens Software Solutions (Denmark ApS): incorporated in Denmark (owned 100% by Sapiens (UK Insurance Software Solutions Limited))
Sapiens Software Solutions Instanbul: incorporated in Turkey (owned 100% by Sapiens Technologies (1982) Ltd.)
Sapiens SA PTY Ltd.: incorporated in South Africa (owned 100% by Sapiens (UK Insurance Software Solutions Limited))
We are a member of the Formula Systems (1985) Ltd., or Formula, Group (NASDAQ: FORTY and TASE: FORT). Formula is a holding and managing company of (currently) three publicly traded companies that provide IT solutions worldwide, developing and implementing innovative, proprietary software, services and solutions, turnkey projects and outsourcing services, as well as software distribution and support.
Based on information provided to the Company by Formula, Formula held 23,954,094 of our Common Shares, or approximately 48.9% of our outstanding Common Shares as of March 1, 2017. As of March 1, 2017, Asseco beneficially owned 46.3% of the outstanding share capital of Formula.
Based on the foregoing beneficial ownership by each of Formula and Asseco, each of Formula and Asseco may be deemed to directly or indirectly (as appropriate) control us.
|D.||Property, Plants and Equipment.|
We lease office space, constituting our primary office locations, in the following countries: Israel, the United States, Canada, the United Kingdom, Belgium, Japan, India and Poland. The lease terms for the spaces that we currently occupy are generally five to eleven years. Based on our current occupancy, we lease (except for owned real property indicated below) the following amount of office space in the following locations, which constitute our primary locations:
|·||Israel – approximately 135,100 square feet;|
|·||United States – approximately 20,300 square feet*;|
|·||Canada – approximately 1,400 square feet;|
|·||United Kingdom – approximately 21,400 square feet;|
|·||Japan – approximately 6,400 square feet;|
|·||India – approximately 45,400 square feet;|
|·||Poland – approximately 27,200 square feet; and|
|·||China – approximately 1,200 square feet.|
* 10,243 square feet of such office space in the United States constitutes owned real property.
Our Israeli offices house our corporate headquarters, as well as our core research and development activities. As of December 31, 2016, the lease at our Israeli facility is for a term of in excess of seven remaining years and we have an option to extend the term for an additional five years. In 2016, our rent costs totaled $6.3 million, in the aggregate, for all of our leased offices (which does not include office space leased by StoneRiver in the United States, since it was acquired after December 31, 2016). We believe that our existing facilities are adequate for our current needs.
|Item 4A.||UNRESOLVED STAFF COMMENTS|
|ITEM 5.||OPERATING AND FINANCIAL REVIEW AND PROSPECTS|
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere herein. Our financial statements have been prepared in accordance with U.S. GAAP. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. As a result of many factors, such as those set forth under Item 3.D “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in the Introduction to this annual report, our actual results may differ materially from those anticipated in these forward-looking statements.
We are a leading global provider of software solutions for the insurance industry, with an emerging focus on the broader financial services sector. We offer core software solutions for Life, Pension & Annuities (L&P) and Property & Casualty/General Insurance (P&C) providers, allowing them to manage policy administration, claims management and billing functions. We also provide record-keeping software solutions for Retirement Services providers. In addition, we offer a variety of other technology-based solutions that enable organizations to deploy business logic and comply with policies and regulations across their organizations. Our solutions enable customers to respond to evolving market needs and regulatory changes, while improving the efficiency of their core operations, thereby increasing revenues and reducing costs.
We derive our revenues principally from the sale, implementation, maintenance and support of our solutions and from providing consulting and other services related to our products. Revenues are comprised primarily of revenues from services, including systems integration and implementation and product maintenance and support, and from licenses of our products.
We also generate revenues from other customers unrelated to the financial services industry, which use our legacy solution based on e-Merge software. For these customers, except for the difference in the target industry, revenues are recognized from the sale of package-based software solutions that include the grant of a license to use our product, implementation and customization services related to the product sold and maintenance and support services and follow similar methods of project delivery. See “Critical Accounting Policies and Estimates” below for a discussion of how we account for our revenues and their associated costs.
Key Business Metrics
We use certain key financial metrics to evaluate and manage our business and that we believe are useful for investors, including select GAAP and non-GAAP metrics. These metrics include, most prominently, our operating cash flow.
Operating Cash Flows
We monitor our cash flows from operating activities, or operating cash flows, as a key measure of our overall business performance, enabling us to analyze our financial performance without the effects of certain non-cash items such as depreciation and amortization and stock-based compensation expenses. Additionally, operating cash flows take into account the impact of changes in deferred revenue, which reflects the receipt of cash payment for products and services before they are recognized as revenue. Our operating cash flows are impacted by changes in deferred revenue and collections of accounts receivable. As a result, our operating cash flows may fluctuate significantly on a quarterly basis.
Our operating cash flows were $21.6 million, $40.4 million and $26.0 million for the years ended December 31, 2014, 2015 and 2016, respectively. For a further discussion of our operating cash flows, see “Item 5.B. Liquidity and Capital Resources‒Cash Flows from Operating Activities” below in this annual report.
GAAP Results of Operations
The following tables set forth certain data from our results of operations for the years ended December 31, 2014, 2015 and 2016, as well as such data as a percentage of our revenues for those years. The data has been derived from our audited consolidated financial statements included in this annual report. The operating results for the below years should not be considered indicative of results for any future period. This information should be read in conjunction with the audited consolidated financial statements and notes thereto included in this annual report.
|Statement of Income Data|
|(U.S. dollars, in thousands, except share and per share data)|
|Year ended |
|Cost of revenues||99,095||111,192||130,402|
|Research and development||11,352||10,235||16,488|
|Selling, marketing, general and administrative||32,097||39,859||44,460|
|Total operating expenses||43,449||50,094||60,948|
|Financial income, net||124||163||533|
|Income before taxes on income||15,030||24,513||25,373|
|Taxes on income||(454||)||(4,213||)||(5,772||)|
|Attributed to non-controlling interests||131||59||(43||)|
|Attributed to redeemable non-controlling interest||(18||)||1||(134||)|
|Adjustment to redeemable non-controlling interest||-||224||442|
|Net income attributable to Sapiens’ shareholders||$||14,463||20,016||19,336|
|Statement of Income Data as a Percentage of Revenues|
|Year ended |
|Cost of revenues||62.9||%||59.9||%||60.3||%|
|Research and development||7.2||%||5.5||%||7.6||%|
|Selling, marketing, general and administrative||20.4||%||21.5||%||20.6||%|
|Total operating expenses||27.6||%||27.0||%||28.2||%|
|Financial income, net||0.1||%||0.1||%||0.2||%|
|Income before taxes on income||9.6||%||13.2||%||11.7||%|
|Taxes on income||0.3||%||2.3||%||2.7||%|
|Attributed to non-controlling interests||0.1||%||0.0||%||0.0||%|
|Attributed to redeemable non-controlling interest||0.0||%||0.0||%||0.0||%|
|Adjustment to redeemable non-controlling interest||0.0||%||0.1||%||0.1||%|
|Net income attributable to Sapiens’ shareholders||9.2||%||10.8||%||8.9||%|
Comparison of the years ended December 31, 2015 and 2016
Please refer to “Critical Accounting Policies and Estimates” below in this Item 5.A for a description of our accounting policies related to revenue recognition.
Our overall revenues increased by $30.6 million, or 16.5%, to $216.2 million for the year ended December 31, 2016 from $185.6 million for the year ended December 31, 2015, as shown in the table below:
|($ in thousands)||$||185,636||16.5||%||$||216,190|
Revenues are derived primarily from implementation of our solutions and post-implementation services such as ongoing support and maintenance and professional services as part of an overall solution that we offer to our customers. The increase in revenues for the year ended December 31, 2016 is attributed to organic growth of approximately $38.0 million, primarily due to implementation and professional services generated from existing and new customers, which were offset in part, in an amount of $4.6 million, due to the devaluation of foreign currencies (in which revenues were received) relative to the U.S. dollar. The increase was furthermore due to $3.5 million of revenues attributable to MaxPro and 4Sight, the results of which were included in our consolidated results for the first time for the year ended December 31, 2016.
Revenues by geographical region
The dollar amount and percentage share of our revenues attributable to each of the geographical regions in which we conduct our operations for the year ended December 31, 2015 and 2016, respectively, as well as the percentage change between such periods, were as follows:
|Year ended December 31,|
Year ended December 31,
|($ in thousands)||Revenues||Percentage||year change||Revenues||Percentage|
|Rest of Europe||32,897||17.7||%||8.0||%||35,535||16.4||%|
*Revenue amounts for North America that are shown in the above table consist of revenues from the United States, except for approximately $0.5 million and $0.9 million of revenues generated in Canada in the years ended December 31, 2015 and 2016, respectively.
Our revenues in North America increased by $13.1 million, or 21.4%, to $74.5 million for the year ended December 31, 2016 from $61.3 million for the year ended December 31, 2015, reflecting an increase of $9.6 million in revenues from existing and new customers, as well as an increase of $3.5 million of revenues attributable to MaxPro and 4Sight, the results of which were included in our consolidated results for the first time for the year ended December 31, 2016.
Our revenues in the United Kingdom increased by $4.3 million, or 10.1%, to $46.9 million in the year ended December 31, 2016 from $42.6 million in the year ended December 31, 2015. The increase was attributable to an increase of $10.52 million in revenues from our existing and new customers, offset by $6.2 million due to devaluation of the GBP relative to the U.S. dollar resulting from the decision of United Kingdom to exit the European Union.
Our revenues in the Rest of Europe increased by $2.6 million, or 8.0%, to $35.5 million in the year ended December 31, 2016 from $32.9 million in the year ended December 31, 2015. The increase was attributable to an increase in revenues from our existing and new customers.
Our revenues in Israel increased by $0.8 million, or 2.7%, to $29.1 million in the year ended December 31, 2016 from $28.3 million in the year ended December 31, 2015.
Our revenues in Asia Pacific, or APAC, increased by $9.7 million, or 47.3%, to $30.2 million in the year ended December 31, 2016 from $20.5 million in the year ended December 31, 2015. The increase was attributable to an increase of $7.7 million in revenues from our existing and new customers in Japan, as well as an increase of $2.0 million due to the appreciation of foreign currencies (primarily the Japanese yen) relative to the U.S. dollar.
Cost of Revenues
Our cost of revenues for the years ended December 31, 2015 and 2016, respectively (both in absolute terms and as a percentage of our overall revenues), as well as the percentage change between those years, are provided in the below table:
|($ in thousands)||Year ended|
|Cost of revenues||$||111,192||17.3||%||$||130,402|
|Cost of revenues as a percentage of revenues||59.9||%||60.3||%|
Our cost of revenues increased by $19.2 million, or 17.3%, to $130.4 million for the year ended December 31, 2016, as compared to $111.2 million for the year ended December 31, 2015. Cost of revenues increased as a percentage of our revenues during the year ended December 31, 2016, to 60.3% as compared to 59.9% during the year ended December 31, 2015. The increase in absolute cost of revenues was related to the increase in revenues during the year ended December 31, 2016 relative to the year ended December 31, 2015, including due to the inclusion of MaxPro and 4Sight in our consolidated results for the first time for the year ended December 31, 2016. The level of our cost of revenues as a percentage of our revenues remained relatively stable in 2016. Certain projects in certain non-central locations that are not part of our core insurance business had a lower degree of profitability, which contributed to the slight increase in our cost of revenues as a percentage of our revenues. In addition, the appreciation of the New Israeli Shekel relative to the U.S. dollar also increased our cost of revenues as a percentage of our revenues as recorded in U.S. dollars for the year ended December 31, 2016.
Our gross profit for the years ended December 31, 2015 and 2016, respectively (both in absolute terms and as a percentage of our overall revenues), as well as the percentage change between those periods, are provided in the below table:
|($ in thousands)||Year ended|
|Gross profit as a percentage of revenues||40.1||%||39.7||%|
Our gross profit increased by $11.4 million, or 15.2%, to $85.8 million for the year ended December 31, 2016, as compared to $74.4 million for the year ended December 31, 2015. This increase was primarily attributable to the absolute increase in our revenues by $30.6 million for the year ended December 31, 2016 compared to the year ended December 31, 2015. The decrease in gross profit as a percentage of revenues for the year ended December 31, 2016 was due to the factors described above with respect to the increase in our cost of revenues as a percentage of revenues.
The amount of each category of operating expense for the years ended December 31, 2015 and 2016, respectively, as well as the percentage change in each such expense category between such periods, and the percentage of our revenues constituted by our total operating expenses in each such period, is provided in the below table:
|($ in thousands)||Year ended|
|Research and development, net||$||10,235||61.1||%||$||16,488|
|Selling, marketing, general and administrative||39,859||11.5||%||44,460|
|Total operating expenses||$||50,094||21.7||%||$||60,948|
|Percentage of total revenues||27.0||%||28.2||%|
Research and development expenses, net increased by 61.1% for the year ended December 31, 2016 compared to the year ended December 31, 2015. This increase was attributable to our greater level of investment in research and development activities in support of the expansion of our offering of solutions in the year ended December 31, 2016, including due to the inclusion of MaxPro and 4Sight in our consolidated results for the first time for the year ended December 31, 2016. Our gross research and development expenses (before capitalization of eligible software development costs) for the year ended December 31, 2016 totaled $22.0 million compared to $16.2 million in the year ended December 31, 2015. Such increase of 35.8% was attributable to the same factor related to the increase in our net research and development expenses. Capitalization of software development costs accounted for $5.5 million of our research and development expenses, net for the year ended December 31, 2016 compared to $6.0 million in the year ended December 31, 2015, constituting a non-material change from one such year to the other.
Selling, marketing, general and administrative, or SMG&A, expenses were $44.5 million for the year ended December 31, 2016 compared to $39.9 million in the year ended December 31, 2015. The increase was attributable to a greater investment in our sales and marketing organizations team and our increased marketing expenses to support our brands and expand sales opportunities, including due to the inclusion of MaxPro and 4Sight in our consolidated results for the first time for the year ended December 31, 2016, which was evidenced by the 16.5% increase in our revenues in the year ended December 31, 2016. As a percentage of total revenues, our SMG&A decreased from 21.5% in the year ended December 31, 2015 to 20.6% for the year ended December 31, 2016, constituting a non-material change from one such period to the other.
Operating income and operating income as a percentage of total revenues for the years ended December 31, 2015 and 2016, respectively, as well as the percentage change in operating income between such periods, were as follows:
|($ in thousands)||Year ended|
|Percentage of total revenues||13.1||%||11.5||%|
The increase in our operating income during the year ended December 31, 2016 relative to the year ended
December 31, 2015 as an absolute amount, and the decrease in operating income as a percentage of our revenues, as reflected in the above table, were attributable to the various gross profit and operating expenses trends described above.
Financial income, net
The amount of our financial income, net, for the years ended December 31, 2015 and 2016, respectively, and the percentage of our revenues for those respective periods constituted by such amounts, as well as the percentage change in such amounts between such periods, were as follows:
|($ in thousands)||Year ended|
|Financial income, net||$||163||227.0||%||$||533|
|Percentage of total revenues||0.1||%||0.2||%|
Financial income, net, was $0.5 million for the year ended December 31, 2016 compared to financial income of $0.2 million in the year ended December 31, 2015.
We engage in economic hedging in order to help protect against fluctuation in foreign currency exchange rates. Instruments that we use to manage currency exchange risks may include foreign currency forward contracts. The purpose of our foreign currency hedging activities is to reduce our exposure, from the perspective of our profitability, to the risks that arise from the adverse impact that exchange rates bear on our revenues and expenses that are denominated in non-U.S. currencies. These instruments are used selectively to manage risks, but there can be no assurance that we will be fully protected against material foreign currency fluctuations. We do not use these instruments for speculative or trading purposes.
Taxes on income
Taxes on income, both as a dollar value and as a percentage of income before taxes on income, for the years ended December 31, 2015 and 2016, respectively, as well as the percentage change in the amount of taxes on income between such periods, were as follows:
|($ in thousands)||Year ended|
|Taxes on income||$||4,213||37.0||%||$||5,772|
|As a percentage of income before taxes on income||17.2||%||22.7||%|
The increase in our expense from taxes on income was primarily attributable to an increase in our taxable income in Israel, the United States, APAC and other jurisdictions in which we operate. In addition, during the year ended December 31, 2016, certain of our subsidiaries in Israel and the UK became subject to tax liability following the utilization of tax benefits in previous years.
Our effective income tax rate varies from period to period as a result of the various jurisdictions in which we operate, as each jurisdiction has its own system of taxation (not only with respect to the nominal rate, but also with respect to the allowance of deductions, credits and other benefits). We record a valuation allowance if we believe that it is more likely than not that the deferred income taxes regarding the loss carry forwards and other temporary differences, on which a valuation allowance has been provided, will not be realized in the foreseeable future. We do not recognize certain of the deferred tax assets relating to the net operating losses of certain of our subsidiaries worldwide due to the uncertainty of the realization of such tax benefits in the foreseeable future.
Net income attributable to Sapiens shareholders
The amount of net income attributable to Sapiens shareholders and such amount as a percentage of revenues for the years ended December 31, 2015 and 2016, respectively, as well as the percentage change in net income attributable to Sapiens shareholders between such periods, were as follows:
|($ in thousands)||Year ended|
|Net income attributable to Sapiens shareholders||$||20,016||(3.4||)%||$||19,336|
|Percentage of total revenues||10.8||%||8.9||%|
As a percentage of total revenues, our net income attributable to Sapiens shareholders decreased from 10.8% in the year ended December 31, 2015 to 8.9% for the year ended December 31, 2016, reflecting the cumulative effect of all of the above-described line items from our statements of income.
Comparison of the years ended December 31, 2014 and 2015
Please refer to “Critical Accounting Policies and Estimates” below in this Item 5.A for a description of our accounting policies related to revenue recognition.
Our overall revenues increased by $28.2 million, or 17.9%, to $185.6 million for the year ended December 31, 2015 from $157.4 million for the year ended December 31, 2014, as shown in the table below.
|($ in thousands)||157,450||17.9||%||185,636|
Revenues are derived primarily from implementation of our solutions and post-implementation services such as ongoing support and maintenance and professional services as part of an overall solution that we offer to our customers. The increase in revenues for the year ended December 31, 2015 is attributed to organic growth of approximately $25.6 million, primarily due to implementation and professional services generated from existing and new customers, which were offset in part, in an amount of $11.6 million, due to the devaluation of foreign currencies (in which revenues were received) relative to the U.S. dollar. The increase was furthermore due to $14.2 million of revenues attributable to Ibexi and Insseco, the results of which were included in our consolidated results for the first time for the year ended December 31, 2015 (in the case of Insseco, for the full year ended December 31, 2015, due to the pooling of interest accounting treatment accorded to the acquisition of Insseco).
Revenues by geographical region
The dollar amount and percentage share of our revenues attributable to each of the geographical regions in which we conduct our operations for the year ended December 31, 2014 and 2015, respectively, as well as the percentage change between such periods, were as follows:
December 31, 2014
December 31, 2015
|($ in thousands)||Revenues||Percentage||year change||Revenues||Percentage|
|Rest of Europe||28,351||18.0||%||16.0||%||32,897||17.7||%|
*Revenue amounts for North America that are shown in the above table consist of revenues from the United States, except for approximately $0.6 million and $0.5 million of revenues generated in Canada in the years ended December 31, 2014 and 2015, respectively.
Our revenues in North America increased by $11.7 million, or 23.7%, to $61.3 million for the year ended December 31, 2015 from $49.6 million for the year ended December 31, 2014, due to an increase in revenues from our existing and new customers.
Our revenues in the United Kingdom increased by $7.6 million, or 21.8%, to $42.6 million in the year ended December 31, 2015 from $35.0 million in the year ended December 31, 2014. The increase was attributable to an increase in revenues from our existing and new customers.
Our revenues in the Rest of Europe increased by $4.5 million, or 16.0%, to $32.9 million in the year ended December 31, 2015 from $28.4 million in the year ended December 31, 2014. The increase was attributable, in primary part to an increase of $10.5 million due to the consolidation of Insseco’s results with our results for the year ended December 31, 2015, as described above, offset, in part, by a decrease of $5.8 million in our other revenues related to our various products.
Our revenues in Israel decreased by $0.5 million, or 1.8%, to $28.3 million in the year ended December 31, 2015 from $28.8 million in the year ended December 31, 2014.
Our revenues in Asia Pacific, or APAC, increased by $4.8 million, or 30.4%, to $20.5 million in the year ended December 31, 2015 from $15.7 million in the year ended December 31, 2014. The increase was attributable primarily to an increase of $3.5 million of revenues attributable to Ibexi, the results of which were included in our consolidated results for the first time for the year ended December 31, 2015.
Cost of Revenues
Our cost of revenues for the years ended December 31, 2014 and 2015, respectively (both in absolute terms and as a percentage of our overall revenues), as well as the percentage change between those years, are provided in the below table:
|($ in thousands)||Year ended|
|Year ended |
|Cost of revenues||$||99,095||12.2||%||$||111,192|
|Cost of revenues as a percentage of revenues||62.9||%||59.9||%|
Our cost of revenues increased by $12.1 million, or 12.2%, to $111.2 million for the year ended December 31, 2015, as compared to $99.1 million for the year ended December 31, 2014. Cost of revenues decreased as a percentage of our revenues during the year ended December 31, 2015, to 59.9% as compared to 62.9% during the year ended December 31, 2014. The increase in absolute cost of revenues was related to the increase in revenues during the year ended December 31, 2015 relative to the year ended December 31, 2014, including an increase in cost of revenues of $9.8 million related to the increase of $14.2 million of revenues due to the acquisitions of, and consolidation in our financial results of, Insseco and Ibexi, in the aggregate, for the year ended December 31, 2015 (in the case of Insseco, for the full year ended December 31, 2015, due to the pooling of interest accounting treatment accorded to the acquisition of Insseco). The decrease in the cost of revenues as a percentage of our revenues during the year ended December 31, 2015 was primarily attributable to our efficiency program that we initiated at the end of 2014, which included, among other factors, hiring of employees in replacement of subcontractors, as well as, recruitment of offshore employees who bore a lower cost to us. In addition, the erosion in the value of the New Israeli Shekel relative to the U.S. dollar reduced our cost of revenues as recorded in U.S. dollars.
Our gross profit for the years ended December 31, 2014 and 2015, respectively (both in absolute terms and as a percentage of our overall revenues), as well as the percentage change between those periods, are provided in the below table:
|($ in thousands)||Year ended|
|Year ended |
|Gross profit as a percentage of revenues||37.1||%||40.1||%|
Our gross profit increased by $16.0 million, or 27.6%, to $74.4 million for the year ended December 31, 2015, as compared to $58.4 million for the year ended December 31, 2014. This increase was primarily attributable to the absolute increase in our revenues by $28.2 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase in gross profit as a percentage of revenues for the year ended December 31, 2015 was due to the factors described above with respect to the decrease in our cost of revenues as a percentage of revenues.
The amount of each category of operating expense for the years ended December 31, 2014 and 2015, respectively, as well as the percentage change in each such expense category between such periods, and the percentage of our revenues constituted by our total operating expenses in each such period, is provided in the below table:
|($ in thousands)||Year ended |
|Research and development, net||$||11,352||(9.8||)%||$||10,235|
|Selling, marketing, general and administrative||32,097||24.2||%||39,859|
|Total operating expenses||$||43,449||15.3||%||$||50,094|
|Percentage of total revenues||27.6||%||27.0||%|
Research and development expenses, net decreased by 9.8% for the year ended December 31, 2015 compared to the year ended December 31, 2014. Such decrease was primarily attributable to erosion in the value of the New Israeli Shekel relative to the U.S. dollar, which reduced our research and development expenses (consisting primarily of salaries of research and development employees) as recorded in U.S. dollars, as a majority of our research and development employees are based in Israel. This decrease was also attributable to a shift in the utilization of our research and development employees for project delivery activities to support the growing demand for our products and services in the year ended December 31, 2015. Our gross research and development expenses for the year ended December 31, 2015 totaled $16.2 million compared to $17.5 million in the year ended December 31, 2014. Such decrease of 6.8% was attributable to the same factors related to the decrease in our net research and development expenses. Capitalization of software development costs accounted for $6.0 million of our research and development expenses net for the year ended December 31, 2015 compared to $6.1 million in the corresponding period of 2014, constituting a non-material change from one such period to the other.
Selling, marketing, general and administrative, or SMG&A, expenses were $39.9 million for the year ended December 31, 2015 compared to $32.1 in the year ended December 31, 2014. The increase was attributable to a greater investment in our sales and marketing organizations team and our increased marketing expenses to support our brands and expand sales opportunities. In addition, the increase in SMG&A was attributable, in an amount of $2.9 million, to the inclusion of the SMG&A of Insseco and Ibexi, in the aggregate, in our consolidated SMG&A for the first time during the year ended December 31, 2015, due to the acquisitions of Insseco and Ibexi, as described above (in the case of Insseco, for the full year ended December 31, 2015, due to the pooling of interest accounting treatment accorded to the acquisition of Insseco). As a percentage of total revenues, our SMG&A increased from 20.4% in the year ended December 31, 2014 to 21.5% for the year ended December 31, 2015, constituting a non-material change from one such period to the other.
Operating income and operating income as a percentage of total revenues for the years ended December 31, 2014 and 2015, respectively, as well as the percentage change in operating income between such periods, were as follows:
|($ in thousands)||Year ended|
|Percentage of total revenues||9.5||%||13.1||%|
The increase in our operating income during the year ended December 31, 2015 relative to the year ended December 31, 2014, both as an absolute amount and as a percentage of our revenues, as reflected in the above table, was attributable to the various gross profit and operating expenses trends described above.
Financial income, net
The amount of our financial income, net, for the years ended December 31, 2014 and 2015, respectively, and the percentage of our revenues for those respective periods constituted by such amounts, as well as the percentage change in such amounts between such periods, were as follows:
|($ in thousands)||Year ended|
|Financial income, net||$||124||31.5||%||$||163|
|Percentage of total revenues||0.1||%||0.1||%|
Financial income, net, were $0.2 million for the year ended December 31, 2015 compared to financial income of $0.1 million in the year ended December 31, 2014.
We engage in economic hedging in order to help protect against fluctuation in foreign currency exchange rates. Instruments that we use to manage currency exchange risks may include foreign currency forward contracts. The purpose of our foreign currency hedging activities is to protect our company from the risk that the eventual dollar cash flows from our international activities will be adversely affected by changes in the exchange rates. These instruments are used selectively to manage risks, but there can be no assurance that we will be fully protected against material foreign currency fluctuations. We do not use these instruments for speculative or trading purposes.
Taxes on income
Taxes on income, both as a dollar value and as a percentage of income before taxes on income, for the years ended December 31, 2014 and 2015, respectively, as well as the percentage change in the amount of taxes on income between such periods, were as follows:
|($ in thousands)||Year ended|
|Taxes on income||$||454||828.0||%||$||4,213|
|As a percentage of income before taxes on income||3.0||%||17.2||%|
The increase in our expense from taxes on income was primarily attributable to an increase in our taxable income in Israel, the United States, APAC and other jurisdictions in which we operate. In addition, during the year ended December 31, 2014, we had in place a valuation allowance on one of our subsidiaries’ accumulated tax losses. By the end of 2014, we had a deferred tax asset with respect to those losses, which was subsequently utilized during the year ended December 31, 2015.
Our effective income tax rate varies from period to period as a result of the various jurisdictions in which we operate, as each jurisdiction has its own system of taxation (not only with respect to the nominal rate, but also with respect to the allowance of deductions, credits and other benefits). We record a valuation allowance if we believe that it is more likely than not that the deferred income taxes regarding the loss carry forwards and other temporary differences, on which a valuation allowance has been provided, will not be realized in the foreseeable future. We do not recognize certain of the deferred tax assets relating to the net operating losses of certain of our subsidiaries worldwide due to the uncertainty of the realization of such tax benefits in the foreseeable future.
Net income attributable to Sapiens shareholders
The amount of net income attributable to Sapiens shareholders and such amount as a percentage of revenues for the years ended December 31, 2014 and 2015, respectively, as well as the percentage change in net income attributable to Sapiens shareholders between such periods, were as follows:
|($ in thousands)||Year ended|
|Net income attributable to Sapiens shareholders||$||14,463||38.4||%||$||20,016|
|Percentage of total revenues||9.2||%||10.8||%|
As a percentage of total revenues, our net income attributable to Sapiens shareholders increased from 9.2% in the year ended December 31, 2014 to 10.8% for the year ended December 31, 2015, reflecting the cumulative effect of all of the above-described line items from our statements of income.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our financial statements required us to make estimations and judgments that affect the reporting amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities within the reporting period. We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. More detailed descriptions of these policies are provided in Note 2 to our consolidated financial statements included under Item 18 of this annual report.
We believe that the following critical accounting policies affect the estimates and judgments that we made in preparing our consolidated financial statements:
|·||Goodwill, long lived assets and other identifiable intangible assets|
|·||Taxes on Income|
We generate revenues from sales of software licenses which normally include significant implementation services that are considered essential to the functionality of the software license. In addition, we generate revenues from post implementation consulting services and maintenance services.
Sales of software licenses are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectability is probable. We consider all arrangements with payment terms extending beyond six months from the delivery of the elements, not to be fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer, provided that all other revenue recognition criteria have been met.
We usually sell our software licenses as part of an overall solution offered to a customer that combines the sale of software licenses which normally include significant implementation and that is considered essential to the functionality of the license. We account for the services (either fixed price or T&M -Time and Materials) together with the software under contract accounting using the percentage-of-completion method in accordance with Accounting Standards Codification, or ASC, 605-35, “Construction-Type and Production-Type Contracts”. The percentage of completion method is used when the required services are quantifiable, based on the estimated direct costs necessary to complete the project, and under that method revenues are recognized using actual project direct costs incurred as the measure of progress towards completion. The revenues recognized are limited to revenues derived from our enforceable right to receive payment for services that we provide in accordance with our contract with our customer.
The use of the percentage-of-completion method for revenue recognition requires the use of various estimates, including among others, the extent of progress towards completion, contract completion costs and contract revenue. Profit to be recognized is dependent upon the accuracy of estimated progress, achievement of milestones and other incentives and other cost estimates. Such estimates are dependent upon various judgments we make with respect to those factors, and some are difficult to accurately determine until the project is significantly underway. Progress is evaluated each reporting period. We recognize adjustments to profitability on contracts utilizing the percentage-of-completion method on a cumulative basis, when such adjustments are identified. We have a history of making reasonably dependable estimates of the extent of progress towards completion, contract revenue and contract completion costs on our long-term contracts. However, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates.
If our actual results turn out to be materially different than our estimates, or we do not manage the project properly within the projected periods of time or satisfy our obligations under the contract, project margins may be significantly and negatively affected, which may result in losses on existing contracts. Any such reductions in margins or contract losses in a large, fixed-price contract may have a material adverse impact on our results of operations.
In accordance with Accounting Standards Codification, or ASC, 985-605, the Company establishes Vendor Specific Objective Evidence, or VSOE, of fair value of maintenance services (PCS) based on the Bell-Shaped approach and determined VSOE for PCS, based on the price charged when the element is sold separately (that is, the actual renewal rate).
Provisions for estimated losses on contracts in progress are made in the period in which they are first determined, in the amount of the estimated loss on the entire contact.
In addition, we derive a significant portion of our revenues from post implementation consulting services provided on a T&M, basis, which are recognized as services are performed.
Maintenance revenue is recognized ratably over the term of the related maintenance agreement.
Deferred revenues and customer advances include unearned amounts received under maintenance and support agreements and amounts received from customers, for which revenues have not yet been recognized.
We perform ongoing credit evaluations on our customers. Under certain circumstances, we may require prepayment. An allowance for doubtful accounts is determined with respect to those amounts that we determine to be doubtful of collection. Provisions for doubtful accounts were recorded in general and administrative expenses.
We account for all our investments in debt securities in accordance with ASC 320, “Investments - Debt and Equity Securities”. We classify all debt securities as “available-for-sale”. All of our investments in available-for-sale securities are reported at fair value. Unrealized gains and losses are comprised of the difference between fair value and the amortized cost of such securities and are recognized, net of tax, in accumulated other comprehensive income (loss).
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization together with interest on securities is included in “financial income, net”.
We recognize an impairment charge when a decline in the fair value of our investments in debt securities below the cost basis of such securities is judged to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and our intent to sell, including whether it is more likely than not that we will be required to sell the investment before recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment is recognized in “net gain on sale of marketable securities previously impaired” in the statements of income and is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income.
According to ASC 805 “Business Combination” we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. In allocating the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, we developed the required assumptions underlying the valuation work. Critical estimates in developing such assumptions underlying the valuing of certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts, acquired developed technologies and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, utilizing a market participant approach, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. We were assisted by third party valuators in applying the required economic models (such as income approach), in order to estimate the fair value of assets acquired and liabilities assumed in our business combination transactions.
For the year ended December 31, 2015, we implemented the pooling of interest accounting method with respect to our acquisition of Insseco. We applied the pooling of interest accounting method with respect to this acquisition because we and Insseco were under common control. Thus, our balance sheet as of December 31, 2014 was adjusted to reflect the carrying amounts combination between our company and Insseco.
Goodwill, long lived assets and other identifiable intangible assets
Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350,” Intangibles - Goodwill and Other”, goodwill is subject to an annual impairment test or more frequently if impairment indicators are present. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The company operates in a total of four reporting units: Emerge, L&P, Decision and P&C.
We applied the provisions of ASC 350 for our annual impairment test. Under the provisions, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required.
We performed a qualitative assessment during the fourth quarter of each of 2014, 2015 and 2016 and concluded that the qualitative assessment did not result in a more likely than not indication of impairment, and, therefore, no further impairment testing was required.
Nevertheless, it is possible that our determination that goodwill for a reporting unit is not impaired could change in the future if current economic conditions deteriorate or remain difficult for an extended period of time. We continue to monitor the relationship between our market capitalization and book value, as well as the ability of our reporting units to deliver current and income and cash flows sufficient to support the book values of the net assets of their respective businesses.
As of December 31, 2016, we had a total of $28.4 million of intangible assets, of which $20.8 million were attributable to capitalized software development costs, and the remainder of which were acquired as part of our prior acquisitions.
In accordance with ASC 360, “Property, Plant and Equipment”, or ASC 360, our long-lived assets are reviewed for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. In measuring the recoverability of assets, we are required to make estimates and judgments in assessing our forecast and cash flows and compare that with the carrying amount of the assets. Additional significant estimates used by management in the methodologies used to assess the recoverability of our long-lived assets include estimates of future cash-flows, future short-term and long-term growth rates, market acceptance of products and services, and other judgmental assumptions, which are also affected by factors detailed in our Risk Factors section in this annual report (see “Item 3.D. Key Information – Risk Factors”). If these estimates or the related assumptions change in the future, we may be required to record impairment charges for our long-lived assets.
We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, in accordance with ASC 360 (as described above). In evaluating potential impairment of these assets, we specifically consider whether any indicators of impairment are present, including, but not limited to whether there:
|·||has been a significant adverse change in the business climate that affects the value of an asset;|
|·||has been a significant change in the extent or manner in which an asset is used; and/or|
|·||is an expectation that the asset will be sold or disposed of before the end of its originally estimated useful life.|
If indicators of impairment are present, we compare the estimated undiscounted cash flows that the specific asset is expected to generate to its carrying value. These estimates involve significant subjectivity. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.
Our policy for capitalized software costs determines the timing of our recognition of certain development costs. Software development costs incurred from the point of reaching technological feasibility until the time of general product release are capitalized. We define technological feasibility as the completion of a detailed program design. The determination of technological feasibility requires the exercise of judgment by our management. Since we sell our products in a market that is subject to rapid technological changes, new product development and changing customer needs, changes in circumstances and estimations may significantly affect the timing and the amounts of software development costs capitalized and thus our financial condition and results of operations.
Capitalized software development costs are amortized commencing with general product release by the straight-line method over the estimated useful life of the software product (between five to seven years). We assess the recoverability of this intangible asset on a regular basis by determining whether the amortization of the asset over its remaining life can be recovered through undiscounted future operating cash flows from the specific software product sold.
Taxes on Income
We account for income taxes in accordance with ASC 740 “Income Taxes”, or ASC 740. ASC 740 prescribes the use of the asset and liability method, whereby deferred tax assets and liability account balances are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Future realization of our deferred tax assets ultimately depends on the existence of sufficient taxable income within the available carryback or carryforward periods. Sources of taxable income include future reversals of existing taxable temporary differences, future taxable income, taxable income in prior carryback years and tax planning strategies. We record a valuation allowance to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. Changes in our valuation allowance impact income tax expense in the period of adjustment. Our deferred tax valuation allowances require significant judgment and uncertainties, including assumptions about future taxable income that are based on historical and projected information.
ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, a company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We assess our income tax positions and record tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. We classify liabilities for uncertain tax positions as non-current liabilities unless the uncertainty is expected to be resolved within one year. We classify interest as financial expenses and penalties as selling, marketing, general and administration expenses.
As a global company, we use significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which we operate. In the ordinary course of our business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with our subsidiaries and tax credit estimates. In addition, the calculation of acquired tax attributes and the associated limitations are complex and although our income tax reserves are based on our best knowledge, we may be subject to unexpected audits by tax authorities in the various countries where we have subsidiaries, which may result in material adjustments to the reserves established in our consolidated financial statements and have a material adverse effect on our results of operations. We estimate our exposure to unfavorable outcomes related to these uncertainties and estimate the probability for such outcomes.
Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome will not be different from what is reflected in our historical income tax provisions, returns, and accruals. Such differences, or changes in estimates relating to potential differences, could have a material impact on our income tax provision and operating results in the period in which such a determination is made.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The new revenue recognition standard will be effective in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. We currently anticipate adopting the new standard effective January 1, 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We preliminarily anticipate adopting the standard using the modified retrospective method. However, we are continuing to evaluate the impact of the standard on our consolidated financial statements and related disclosures and the adoption method is subject to change.
In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), whereby, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. A modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements must be applied. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Companies may not apply a full retrospective transition approach. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early application is permitted. We are evaluating the potential impact of this pronouncement.
In March 2016, the FASB issued ASU 2016-09, which provides for improvements to employee share-based payment accounting. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. We do not expect that this new guidance will have a material impact on our consolidated financial statements.
In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”), which clarifies the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will be our interim period beginning January 1, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods with that reporting period. We are evaluating the impact of this standard.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for us in the first quarter of 2018 and early adoption is permitted. We are still evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
Impact of Tax Policies and Programs on our Operating Results
Israeli Tax Considerations and Government Programs
Tax regulations have a material impact on our business, particularly in Israel where we have our headquarters and due to our election to be treated as an Israeli resident corporation for tax purposes. The following summary describes the current tax structure applicable to companies in Israel, with special reference to its effect on us.
General Corporate Tax Structure
Generally, Israeli companies are subject to corporate tax on their taxable income. In 2016, the corporate tax rate was 25% (in 2017 the corporate tax rate is 24% and as of 2018 the corporate tax rate will be 23%). However, the effective tax rate payable by a company that derives income from an Approved Enterprise or a Preferred Enterprise, as further discussed below, may be considerably lower. See “Law for the Encouragement of Capital Investments” in this Item 5.A below. In addition, Israeli companies are currently subject to regular corporate tax rate on their capital gains.
Besides being subject to the general corporate tax rules in Israel, certain of our Israeli subsidiaries have also, from time to time, applied for and received certain grants and tax benefits from, and participate in, programs sponsored by the Government of Israel, as described below.
Law for the Encouragement of Industry (Taxes), 1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, or the Industry Encouragement Law, provides several tax benefits for an “Industrial Company”. Pursuant to the Industry Encouragement Law, a company qualifies as an Industrial Company if it is an Israeli resident company which was incorporated in Israel and at least 90% of its income in any tax year (other than income from certain government loans) is generated from an “Industrial Enterprise” that it owns and located in Israel. An “Industrial Enterprise” is defined as an enterprise whose major activity, in a given tax year, is industrial production.
An Industrial Company is entitled to certain tax benefits, including:
|§||Deduction of the cost of the purchases of patents, or the right to use a patent or know-how used for the development or promotion of the Industrial Enterprise, over an eight year period commencing on the year in which such rights were first exercised;|
|§||The right to elect, under certain conditions, to file a consolidated tax return together with Israeli Industrial Companies controlled by it; and|
|§||Accelerated depreciation rates on equipment and buildings.|
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
We believe that certain of our Israeli subsidiaries currently qualify as Industrial Companies within the definition under the Industry Encouragement Law. We cannot assure you that we will continue to qualify as Industrial Companies or that the benefits described above will be available in the future.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, provides certain incentives for capital investments in a production facility (or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment Law, referred to as an Approved Enterprise, a Preferred Enterprise or a Preferred Enterprise, is entitled to benefits as discussed below. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the geographic location in Israel of the facility in which the investment is made. In order to qualify for these incentives, an Approved Enterprise, a Preferred Enterprise or a Preferred Enterprise is required to comply with the requirements of the Investment Law.
The Investment Law has been amended several times over the recent years, with the three most significant changes effective as of April 1, 2005 (referred to as the 2005 Amendment), as of January 1, 2011 (referred to as the 2011 Amendment) and as of January 1, 2017 (referred to as the 2017 Amendment). Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the amended Investment Law. Similarly, the 2011 Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect up to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and elect the benefits of the 2011 Amendment. The 2017 Amendment introduces new benefits for Technological Enterprises, alongside the existing tax benefits.
Tax benefits for Approved Enterprises approved before April 1, 2005
Under the Investment Law prior to the 2005 Amendment, a company that wished to receive benefits on its investment program that is implemented in accordance with the provisions of the Investment Law (referred to as an Approved Enterprise), had to receive an approval from the Israeli Authority for Investments and Development of the Industry and Economy (referred to as the Investment Center). Each certificate of approval for an Approved Enterprise relates to a specific investment program, delineated both by the financial scope of the investment, including sources of funds, and by the physical characteristics of the facility or other assets.
An Approved Enterprise may elect to forego any entitlement to the cash grants otherwise available under the Investment Law and, instead, participate in an alternative benefits program. Under the alternative benefits program, a company’s undistributed income derived from an Approved Enterprise will be exempt from corporate tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location within Israel of the Approved Enterprise, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as detailed below. The benefits period under Approved Enterprise status is limited to 12 years from the year in which the production commenced (as determined by the Investment Center), or 14 years from the year of receipt of the approval as an Approved Enterprise, whichever ends earlier. If a company has more than one Approved Enterprise program or if only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates. The tax benefits available under any certificate of approval relate only to taxable income attributable to the specific program and are contingent upon meeting the criteria set out in the certificate of approval. Income derived from activity that is not integral to the activity of the Approved Enterprise will not enjoy tax benefits.
A company that has an Approved Enterprise program is eligible for further tax benefits, if it qualifies as a Foreign Investors’ Company, or FIC. An FIC eligible for benefits is essentially a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether or not a company qualifies as an FIC is made on an annual basis. An FIC that has an Approved Enterprise program will be eligible for an extension of the period during which it is entitled to tax benefits under its Approved Enterprise status (so that the benefits period may be up to ten years) and for further tax benefits if the level of foreign investment is 49% or more. If a company that has an Approved Enterprise program is a wholly owned subsidiary of another company, then the percentage of foreign investment is determined based on the percentage of foreign investment in the parent company.
The corporate tax rates and related levels of foreign investments with respect to an FIC that has an Approved Enterprise program are set forth in the following table:
|Percentage of non-Israeli ownership||Corporate Tax Rate|
|Over 25% but less than 49%||25||%|
|49% or more but less than 74%||20||%|
|74% or more but less than 90%||15||%|
|90% or more||10||%|
A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived from the portion of its facilities that have been granted Approved Enterprise status during the tax exemption period will be subject to tax in respect of the amount of dividend distributed (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate that would have been otherwise applicable if such income had not been tax-exempted under the alternative benefits program. This rate generally ranges from 10% to 25%, depending on the level of foreign investment in the company in each year as explained above.
In addition, dividends paid out of income attributed to an Approved Enterprise (or out of dividends received from a company whose income is attributed to an Approved Enterprise) are generally subject to withholding tax at the rate of 15%, or at a lower rate provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to 30%, or at a lower rate under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). In the case of an FIC, the 12-year limitation on reduced withholding tax on dividends does not apply.
The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program in the first five years of using the equipment. This benefit is an incentive granted by the Israeli government regardless of whether the alternative benefits program is elected.
The benefits available to an Approved Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval with respect thereto, as described above. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, adjusted to the Israeli consumer price index and interest, or other monetary penalty.
Under the terms of the Approved Enterprise program, income that is attributable to one of our Israeli subsidiaries has been exempted from income tax for a period of two years commencing in 2014.
Tax benefits under the 2011 Amendment that became effective on January 1, 2011
The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such terms are defined in the Investment Law) as of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly owned by a governmental entity or (ii) a limited partnership that (a) was registered under the Israeli Partnerships Ordinance and (b) all of its limited partners are companies incorporated in Israel, but not all of them are governmental entities; which has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its preferred income attributed to its Preferred Enterprise in 2011 and 2012, unless the Preferred Enterprise is located in a certain development zone, in which case the rate will be 10%. Such corporate tax rate was reduced to 12.5% and 7%, respectively, in 2013 and was increased to 16% and 9%, respectively, in 2014 until 2016. Pursuant to the 2017 Amendment, in 2017 and thereafter, the corporate tax rate for a Preferred Enterprise that is located in a specified development zone was decreased to 7.5%, while the reduced corporate tax rate for other development zones remains 16%. Income derived by a Preferred Company from a ‘Special Preferred Enterprise’ (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or 5% if the Special Preferred Enterprise is located in a certain development zone. As of January 1, 2017, the definition for ‘Special Preferred Enterprise’ includes less stringent conditions.
Dividends paid out of preferred income attributed to a Preferred Enterprise or to a Special Preferred Enterprise are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). In 2017 to 2019, dividends paid out of preferred income attributed to a Special Preferred Enterprise, directly to a foreign parent company, are subject to withholding tax at source at the rate of 5% (temporary provisions).
The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits under the Investment Law. These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, which chose to receive grants, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; and (ii) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, that had participated in an alternative benefits program, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met. As of December 31, 2015, some of our Israeli subsidiaries had filed a request to apply the new benefits under the 2011 Amendment.
New Tax benefits under the 2017 Amendment that became effective on January 1, 2017
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and is effective as of January 1, 2017, subject to the publication of regulations expected to be released before March 31, 2017. The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income”, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development zone A. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefited Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefited Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the National Authority for Technological Innovation (referred to as NATI).
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a “Special Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefited Intangible Assets” to a related foreign company if the Benefited Intangible Assets were either developed by an Israeli company or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from NATI. A Special Preferred Technology Enterprise that acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are subject to withholding tax at source at the rate of 20%, and if distributed to a foreign company and other conditions are met, the withholding tax rate will be 4%.
We are examining the impact of the 2017 Amendment and the degree to which we will qualify as a Preferred Technology Enterprise or Special Preferred Technology Enterprise, and the amount of Preferred Technology Income that we may have, or other benefits that we may receive, from the 2017 Amendment.
Tax Benefits for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction for research and development expenditures, including capital expenditures, for the year in which they are incurred. Such expenditures must relate to scientific research and development projects, and must be approved by the relevant Israeli government ministry, determined by the field of research. Furthermore, the research and development must be for the promotion of the company’s business and carried out by or on behalf of the company seeking such tax deduction. However, the amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. Expenditures not so approved by the relevant Israeli government ministry, but otherwise qualifying for deduction, are deductible over a three-year period.
|B.||Liquidity and Capital Resources|
To date, we have substantially satisfied our capital and liquidity needs through cash flows from operations and sales of our equity securities.
Cash flows provided by operations were $40.4 million and $26.0 million during the years ended December 31, 2015 and 2016, respectively. We used $18.9 million and $8.3 million of cash in investing activities during the years ended December 31, 2015 and 2016, respectively. Cash flows used by financing activities were $14.2 million and $11.2 million during the years ended December 31, 2015 and 2016, respectively. As of December 31, 2015 and 2016, we had $94.0 million and $96.4 million, respectively, of cash, cash equivalents and investments in marketable securities, and $51.3 million and $72.5 million, respectively, of working capital.
We expect that we will continue to generate positive cash flows from operations on an annual basis, although this may fluctuate significantly on a quarterly basis. We believe that based on our current operating forecast, the combination of existing working capital and expected cash flows from operations will be sufficient to finance our ongoing operations for the next twelve months.
Our future capital requirements will depend on many factors, including the rate of growth of our revenues, the expansion of our sales and marketing activities and the timing and extent of our spending to support our research and development efforts and expansion into other markets. We may determine to distribute dividends to our shareholders. See “Item 8. Financial Information - Dividend Policy”. We may also seek to invest in, or acquire complementary businesses, applications or technologies. To the extent that existing cash and cash equivalents, investments in marketable securities and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all.
In connection with our acquisition of StoneRiver, in the first quarter of 2017, we (via our wholly-owned subsidiary, Sapiens Americas Corporation) obtained $40 million of secured debt financing from HSBC Bank USA, National Association pursuant to a credit agreement, as described in “Item 10. Additional Information—C. Material Contracts— HSBC Term Loan Credit Agreement” below. Under the credit agreement with HSBC, we are subject to affirmative covenants and negative covenants, which include, without limitation, restrictions on indebtedness, liens, investments, and certain dispositions with respect to the property secured by the lien of HSBC. The credit agreement also contains customary events of default that entitle the lender to cause any or all of our company's indebtedness to become immediately due and payable and to foreclose on the lien, and includes customary grace periods before certain events are deemed events of default.
The following tables summarize the sources and uses of our cash in the years ended December 31, 2015 and 2016:
|Year ended December 31,|
|(in thousands US$)|
|Net cash provided by operating activities||$||40,440||$||26,039|
|Net cash used in investing activities||(18,853||)||(8,317||)|
|Net cash used in financing activities||(14,177||)||(11,233||)|
We recorded positive cash flows from operating activities of $40.4 million and $26.0 million during the years ended December 31, 2015 and 2016, respectively. This decrease in cash flows provided by operating activities for the year ended December 31, 2016 relative to the year ended December 31, 2015 resulted primarily from a decrease in net income of $0.7 million, from $20.3 million to $19.6 million, which was due to the factors described above. The decrease in cash flows was furthermore attributable to an increase of $5.4 million in accounts receivable during the year ended December 31, 2016, as compared to a decrease of $1.9 million in accounts receivable during the prior year, which year-over-year difference contributed $7.3 million, in the aggregate, to the decrease in operating cash flow during 2016. Another contributing factor was an increase in other operating assets during 2016 relative to the prior year, from an increase of $1.2 million to an increase of $3.3 million, thereby contributing an aggregate of $2.1 million towards the decrease of operating cash flows in the year ended December 31, 2016.
Net cash used in investing activities decreased to $8.3 million for the year ended December 31, 2016 compared to $18.9 million in the year ended December 31, 2015, primarily due to a decrease in purchases of marketable securities and increase in sales of marketable securities in the year ended December 31, 2016 relative to the previous year. In 2016, we received $4.9 million of cash, net, from sales (net of purchases) of marketable securities, compared to $6.2 million used in the purchases of marketable securities (net of sales) in the year ended December 31, 2015, constituting an overall difference of $11.1 million between the two years. The decrease in cash used for investing activities in the year ended December 31, 2016 was offset, in part, by an increase in use of cash, for the acquisition of businesses during 2016, which increased to $4.4 million, compared to $2.9 million in 2015. An additional offsetting factor to the decrease in cash used for investing activities was an increase in use of cash, to an amount of $4.7 million, for the purchase of property and equipment during the year ended December 31, 2016, compared to $2.8 million in 2015.
Our financing activities used $11.2 million of cash during the year ended December 31, 2016, as compared to using $14.2 million of cash in the year ended December 31, 2015. Cash use in the year ended December 31, 2016 was primarily attributable to a cash dividend in a total amount of approximately $9.8 million, as compared to a cash dividend in a total amount of approximately $7.2 million and the distribution of $8.5 million to our ultimate parent company for a business acquisition under common control (that is, for the acquisition of Insseco, as described in Item 3.A, “Selected Financial Data”, above) in the year ended December 31, 2015. Cash used for financing activities during each of the years ended December 31, 2015 and December 31, 2016 was partially offset by $1.6 million and $0.9 million, respectively, of cash provided by stock option exercises during each reported period.
|C.||Research and Development, Patents and Licenses, etc.|
See the caption titled “Research and Development” in part A. “Operating Results” of this Item 5 above for a description of our R&D policies and amounts expended thereon during the last two fiscal years.
There are various sales and marketing trends that influence our business. According to a research report published by Celent, a research and consulting firm, (IT Spending in Insurance, a Global Perspective, 2016, by Jamie Macregor, Juan Mazzini, Karen Monks and KyongSun Kong, published on April 27, 2016), global IT spending by insurance companies is expected to grow from $184.9 billion in 2016 to $208 billion in 2017 and $208.1 billion in 2018. Celent also projected that IT spending in North America would rise to $86 billion in 2017, annual growth of 8.5% from 2016. IT spending in Europe would grow to $59 billion in 2017, at a rate of 1.9% from 2016. Asia-Pacific was expected to climb to $36 billion in 2017 at 5.9% annual growth.
According to Celent, IT spending in external software and services, which is the market we address, was expected to grow from an estimated $81 billion in 2016, is expected to increase to $87 billion by 2017, a 7.3% growth rate. Celent reports that the significant increase in external software and services is driven by pure growth in IT spending, and also from the shift in IT spending from internal to external providers (such as our company). This is due to the move from in-house, home-grown solutions to packaged solutions, as IT departments recognize the value of buying software solutions from specialized vendors, rather than developing internal solutions that are difficult to maintain and do not have the advantage of significant R&D investment.
In the insurance software industry, according to a report by Gartner in 2016 (Modernizing Insurance Core Systems Primer for 2016, published January 21, 2016), legacy modernization remains one of the top projects for P&C and Life insurers.
According to Gartner, over 60% of Life and P&C chief information officers, or CIOs, indicate that legacy modernization is extremely or very important. This strategic roadmap will provide CIOs with insight into how requirements from insurers, solution capabilities and the vendor landscape for legacy modernization will evolve during the next few years (The Report: 2016 Strategic Roadmap for Insurance Legacy Modernization, published on August 16, 2016 by analyst(s): Richard Thomas Natale and Juergen Weiss).
According to Gartner, there is great variation in business priorities among insurers around the globe. However, what is clear is that the direction of business and technology are inextricably intertwined. According to the 2017 Gartner CIO Survey, insurance CIOs identify their top three strategic organizational priorities in 2016 and 2017 as digital business, customer focus and growth (or increasing market share).
The global insurance industry is evolving in a number of areas, and insurance carriers require support from their software and IT service providers to keep up. The primary areas of evolution include:
|·||Globalization and consolidation|
With the growing need for insurance, as people accumulate more property and live longer, the insurance industry has become more competitive. The competition for the customers’ business requires insurers to improve customer experience, be faster to market with new products and offer innovative channels, such as social media and mobile. Innovative technology infrastructure is necessary to support these business initiatives.
In addition, insurers are faced with the increasing significance of regulatory changes to protect the policyholder in many markets, particularly large insurers that are considered important to the stability of the world economic system. Many insurers are integrating enterprise risk management as standard operating procedure, while spreading ownership of risk throughout the strategic decision-making process.
As customers become more sophisticated, the support of innovative products and distribution channels is mandatory. Insurers are identifying growth opportunities by attracting new customers and retaining current customers by seeking to reinvent the customer experience and provide quote and policy information to their customers upon request.
With today’s strong trend of shifting attention to the end-customer experience and activities, there is an increasing focus on digital operations to support the increasing usage of the Internet for sales, recommendations and general communication. This affects the carriers’ needs to innovate their product proposition through a flexible and modern solution. Another substantial trend is the increasing usage of data for decision-making, risk analysis, customers’ evaluation and rating, which requires streamlined data flow and easy access to information from multiple sources.
Increased global competition, the need to improve distribution channels and provide an enhanced customer experience, and efforts to expand into new countries and markets have required heavy investments from insurers, resulting in a trend towards consolidation. This has mainly included consolidation of applications, databases, development tools, hardware and data centers.
|E.||Off-Balance Sheet Arrangements|
We have not engaged in nor been a party to any off-balance sheet transactions.
The following table sets forth information on our short-term and long-term contractual obligations as at December 31, 2016.
|Payments due by period|
|Total||Less than 1|
|1 to 3 |
|3 to 5 years||Over 5 years|
|Accrued severance pay, net (1)||$||899||-||-||-||$||899|
|Liability to the OCS (2)||259||-||-||-||259|
|Contingent payment obligations - acquisitions (3)||3,035||1,676||231||1,128||-|
|Total Contractual Cash Obligations||$||15,881||$||5,726||$||6,631||$||2,296||$||1,158|
|(1)||Accrued severance pay relates to accrued severance obligations mainly to our Israeli employees as required under Israeli labor law. We are legally required to pay severance upon certain circumstances, primarily upon termination of employment by our company, retirement or death of the respective employee. Our liability for all of our Israeli employees is fully provided for by monthly deposits with insurance policies and by an accrual.|
|(2)||Does not include contingent liabilities to the Innovation Authority of approximately $7.1 million as described in Note 10(a) to our consolidated financial statements contained elsewhere in this annual report.|
Contingent payment obligations for our acquisitions do not include contingent payments in an amount of up to $7.8 million, in the aggregate, that are subject to continued employment by the potential recipients thereof.
The total amount of unrecognized tax benefits for uncertain tax positions was $2.5 million as of December 31, 2016. Payment of these obligations would result from settlements with taxing authorities. Due to the uncertainties related to those tax matters, we are currently unable to make a reasonably reliable estimate of when cash settlement with a relevant tax authority will occur. See Note 11(i) to our consolidated financial statements contained elsewhere in this annual report, as of December 31, 2016.
|ITEM 6.||Directors, Senior Management and Employees|
|A.||Directors and Senior Management|
The following table and below biographies set forth certain information regarding the current executive officers and directors of the Company as of February 25, 2016.
|Guy Bernstein||49||Chairman of the Board of Directors|
|Roni Al Dor||56||President, Chief Executive Officer and Director|
|Yacov Elinav (1)||72||Director|
|Uzi Netanel (1)||81||Director|
|Eyal Ben Chlouche (1)||55||Director|
|United International Trust N.V. (2)||Director|
|Roni Giladi||46||Chief Financial Officer|
|(1)||Member of Audit Committee|
|(2)||United International Trust N.V. or UIT, is a corporate body organized under the laws of Curaçao. Mr. Gregory Elias exercises decision making authority for UIT. The Articles of Incorporation of the Company provide that a corporate body may be a member of the Board of Directors.|
Guy Bernstein has served as a director of the Company since January 1, 2007 and was appointed Chairman of the Board of Directors on November 12, 2009. Mr. Bernstein has served as the chief executive officer of Formula, our parent company, since January 2008. From December 2006 to November 2010, Mr. Bernstein served as a director and the chief executive officer of Emblaze Ltd. or Emblaze, our former controlling shareholder. From April 2004 to December 2006, Mr. Bernstein served as the chief financial officer of Emblaze. He also served as a director of Emblaze from April 2004 until November 2010. Prior to joining Emblaze, Mr. Bernstein served as Chief Financial and Operations Officer of Magic Software, a position he held since 1999. Mr. Bernstein joined Magic Software from Kost Forer Gabbay & Kasierer, a member of EY Global, where he acted as senior manager from 1994 to 1997. Mr. Bernstein also serves as Chief Executive Officer of Magic Software and Chairman of the Board of Matrix IT Ltd. Mr. Bernstein is a Certified Licensed Public Accountant and holds a BA in Accounting and Economics from Tel Aviv University.
Roni Al Dor joined the Company as President and Chief Executive Officer in November 2005 and has served as a director of the Company since November 2005. Prior to joining the Company, Mr. Al Dor was one of the two founders of TTI Team Telecom International Ltd., or TTI, a global supplier of operations support systems to communications service providers and from August 1996 until 2004, Mr. Al Dor served as President of TTI. Prior to that, Mr. Al Dor served as TTI’s Co-President from November 1995 until August 1996 and its Vice President from September 1992 to November 1995. During his service in the Israeli Air Force, Mr. Al Dor worked on projects relating to computerization in aircrafts. Mr. Al Dor is a graduate of the military computer college of the Israeli Air Force, studied computer science and management at Bar Ilan University and attended the Israel Management Center for Business Administration.
Eyal Ben-Chlouche has served as a director of the Company since August 15, 2008, Mr. Ben-Chlouche served as the Commissioner of Capital Market Insurance and Savings at the Israeli Ministry of Finance from 2002 through 2005, where he was responsible for implementation of fundamental reforms in pension savings. Prior to that, he served as a Deputy Commissioner of Capital Market Insurance and Savings and as a Senior Foreign Exchange and Investment Manager in the Foreign Exchange Department of the Bank of Israel. He also served as an Investment Officer in the Foreign Exchange Department of the Bank of England, in London. Mr. Ben-Chlouche served as Chairman of the Board of Directors of the Shahar Group, Chairman of the Advisory Board of Directors of the Shekel Group until the end of 2007 and serves as a director of Matrix IT Ltd. and Migdal Holding Ltd. Mr. Ben-Chlouche also serves on the Board of Directors of several other private companies. Mr. Ben-Chlouche also serves as Chairman of the Advisory Board of the Caesarea Center for Capital Markets and Risk Management. In 2005, Mr. Ben-Chlouche served as a member of the Bachar Committee on Capital Market Reform in Israel. Mr. Ben-Chlouche is an independent director.
Naamit Salomon has served as a director of the Company since September 2003. She held the position of Chief Financial Officer of Formula from August 1997 until December 2009. Since January 2010 Ms. Salomon has served as a partner in an investment company. Ms. Salomon also serves as a director of Magic. From 1990 through August 1997, Ms. Salomon was a controller of two large, privately held companies in the Formula Group. Ms. Salomon holds a BA in economics and business administration from Ben Gurion University and an LL.M. from the Bar-Ilan University.
Yacov Elinav has served as a director of the Company since March 2005. For over 30 years, Mr. Elinav served in various positions at Bank Hapoalim B.M., which is listed on the London and Tel Aviv Stock Exchanges, including over 10 years as a member of the Board of Management, responsible for subsidiary and related companies. From 1992 through 2006, Mr. Elinav served as Chairman of the Board of Directors of Diur B.P. Ltd., the real estate subsidiary of Bank Hapoalim. From August 2004 until 2009, Mr. Elinav served as Chairman of the Board of Directors of DS Securities and Investments, Ltd. From August 2004 through 2008, Mr. Elinav served as Chairman of the Board of Directors of DS Provident Funds Ltd., and from 2010 until August 2015, served as Chairman of the Board of Directors of Golden Pages Ltd.. Mr. Elinav also serves on the Board of Directors of several other public and private companies. Mr. Elinav is an independent director.
Uzi Netanel has served has a director of the Company since March 2005. He has served as chairman of the Board of Directors of Maccabi Enterprise Development & Management Ltd., and as Chairman of Maccabi Group Holdings Ltd. from 2005 through 2011. From 2004 through 2007, Mr. Netanel served as Chairman of Board of Directors of M.L.L Software & Computers, and from 2000 through 2011 served as a director of Bazan and Carmel Olephine. From 2001 through 2003, Mr. Netanel served as partner in the FIMI Opportunity Fund. From 1993 through 2001, he served as Active Chairman of Israel Discount Capital Markets and Investments Ltd. From 1997 to 1999, Mr. Netanel served as Chairman of Poliziv Plastics Company (1998) Ltd. From 2005 through 2014, he served as director of Maman Group and from 2012 through 2014, he served as director of Gadot Biochemicals. Mr. Netanel also serves on the Board of Directors of Acme Trading, Scope Metals Ltd. (external director), Assuta Health Centers, and Maccabi Health Services. Mr. Netanel is an independent director.
United International Trust N.V., or UIT, is a corporate body duly established under the laws of the (former) Netherlands Antillies and validly existing under the laws of Curaçao. It, or one of its predecessor entities, has provided the Company with corporate-related services since April 1990, including serving as the Company’s transfer agent and registrar, maintaining the corporate-related records of the Company, and filing various corporate documents with the governmental authorities in the Netherlands Antilles. In January 1, 2007, UIT was established by former shareholders of Intertrust (Curaçao) N.V., including Mr. Elias, which subsequently operated under the names of MeesPierson Intertrust (Curaçao) N.V. and Fortis Intertrust (Curaçao) N.V. Between 2005 and June 2009, Mr. Elias acted as a Supervisory Board Member of Banco di Caribe and currently acts as Of Counsel thereto. Mr. Elias also serves as special counsel to the Government of Curaçao, in international finance / tax matters. He holds board positions in several organizations of a social, economic, (e)-commercial and charitable nature. He was knighted Companion of the Order of Orange-Nassau in March 2011 for his numerous contributions to charity and community projects over the past 30 years. Mr. Elias holds two Masters degrees in Law from the University of Amsterdam, the Netherlands.
Roni Giladi joined the Company as Chief Financial Officer in July 2007. Prior to joining the Company, Mr. Giladi served as the Director of Finance at Emblaze from January 2007. Prior to joining Emblaze, Mr. Giladi served as Chief Financial Officer of RichFX, from August 2003 until November 2006, after serving as Corporate Controller from June 2002. Prior to RichFX, Mr. Giladi worked at EY Israel, from 1997-2002, as a manager in the high-tech practice group. From July 2007 until July 2010, Mr. Giladi served as a board member of MediRisk Solutions Ltd., as the nominee of the Company. Mr. Giladi is Certified Licensed Public Accountant and holds a BA in Business Management and Accounting from the College of Management in Israel.
The Board of Directors must have a minimum of three, and may have a maximum of 24, directors. Directors of the Company are appointed by our General Meeting of Shareholders and hold office until the expiration of the term of their appointment by our General Meeting of Shareholders, or until they resign or are suspended or dismissed by the General Meeting of Shareholders. The Board of Directors may appoint up to four directors in addition to the directors elected by the General Meeting of Shareholders, subject to the maximum number of directors permitted, and any such appointment shall be effective until the next General Meeting of Shareholders. The Board of Directors may fill any vacancies on the Board of Directors, whether as a result of the resignation or dismissal of a director, or as a result of a decision of the Board of Directors to expand the Board of Directors.
Our executive officers are appointed by, and serve at the discretion of, our Board of Directors.
Our Chairman, Guy Bernstein, serves as the Chief Executive Officer of Formula and as a director of Asseco. In addition, Ms. Salomon, another Board member of ours, who served as an executive officer of Formula until December 2009, is a member of the Board of Directors of our affiliate Magic Software Enterprises Ltd. Formula directly owns (as of March 1, 2017) approximately 48.9% of our currently outstanding Common Shares, and Asseco holds a controlling interest in Formula (46.3% of the outstanding share capital of Formula as of March 1, 2017).
|B.||Compensation of Directors and Officers|
The aggregate amount of compensation paid by us, or accrued by us, for all directors and executive officers as a group for services in all capacities with respect to the fiscal year ended December 31, 2016 was $1.7 million. In addition to the foregoing amount, we also set aside or accrued for our directors and executive officers with respect to the fiscal year ended December 31, 2016 $60,000 for pension, retirement severance, vacation accrual and similar benefits of the Company. These compensation amounts do not include amounts expended by us for automobiles made available to our officers or expenses (including business travel and professional and business association dues) reimbursed to such officers. The foregoing amounts also exclude the value of stock option grants to our directors and officers pursuant to our 2011 Share Incentive Plan, which is described below.
We have employment agreements with our officers. We also enter into confidentiality agreements with our personnel and have entered into non-competition and confidentiality agreements with our officers and high-level technical personnel, in each case in the ordinary course of business. We do not maintain key person life insurance on any of our executive officers.
Board Fees and Expenses
We reimburse all members of our Board of Directors for reasonable out-of-pocket expenses incurred in connection with their attendance at meetings of the Board of Directors or its committees.
We pay a fee of approximately $26,600 to our independent directors (except to Formula, to which we pay approximately $23,200 in respect of the service of its Chief Executive Officer, Guy Bernstein, as our Chairman of the Board), for attending or participating in meetings of the Board of Directors and its committees, and for participating in Board action taken via unanimous written consent. Such fees are set in accordance with the rates paid to “external directors” under the Israeli Companies Law 5759-1999. Although we are not an Israeli company and are not subject to the Israeli Companies Law, we deem certain standards of that body of law (including compensation to Board members) relevant to a company such as ours that has a substantial percentage of Israeli operations and Israeli employees. United International Trust N.V., which also qualifies as an independent director, instead receives a fee of $1,200 for director services and an additional annual amount for consulting and related services that it provides to us.
Stock Option and Incentive Plans
Prior Incentive Plans
In 1992, 2003 and 2005, our Board of Directors adopted (and our shareholders subsequently approved) our 1992 Stock Option and Incentive Plan, 2003 Share Option Plan, and Incentive Stock Option Plan, respectively, collectively referred to as our Prior Incentive Plans. These plans were administered by our Compensation Committee. Upon the approval of our 2011 Share Incentive Plan (as described below), our Board of Directors determined that no further awards would be granted under the Prior Incentive Plans. Furthermore, the exercise period for all remaining outstanding options under the Prior Incentive Plans terminated in September 2015. Consequently, there are no remaining awards outstanding under any of the Prior Incentive Plans.
2011 Share Incentive Plan
In 2011, in connection with our acquisition of IDIT and FIS, our Board of Directors adopted our 2011 Share Incentive Plan, or the 2011 Plan, pursuant to which our employees, directors, officers, consultants, advisors, suppliers, business partners, customers and any other person or entity whose services are considered valuable are eligible to receive options, restricted shares, restricted share units and other share-based awards. The number of Common Shares available under the 2011 Plan was set at 4,000,000.
Options granted under the 2011 Plan may be ISOs or NQSOs within the meaning of Section 422 of the Code. In the case of Israeli grantees, we intend that options granted comply with, and benefit from, applicable tax laws and regulations in Israel. We are also eligible to grant restricted stock, restricted share units and other share-based compensation in addition to or in lieu of any other award under the 2011 Plan.
The 2011 Plan is administered by the Compensation Committee. Subject to the provisions of the 2011 Plan, the Compensation Committee determines the type of award, when and to whom awards will be granted and the number of shares covered by each award. The Compensation Committee also determines the terms, provisions, and kind of consideration payable (if any), with respect to awards. The Compensation Committee has discretionary authority to interpret the 2011 Plan and to adopt practices related thereto. In determining the persons to whom awards shall be granted and the number of shares covered by each award, the Compensation Committee takes into account their present and potential contributions to the success of the Company and such other factors as the Compensation Committee shall deem relevant in connection with accomplishing the purpose of the 2011 Plan.
Under the 2011 Plan, an option may be granted on such terms and conditions as the Compensation Committee may approve, and generally may be exercised for a period of up to 6 years from the date of grant. Options granted under the 2011 Plan become exercisable in four equal, annual installments, beginning with the first anniversary of the date of the grant, or pursuant to such other schedule as the Compensation Committee may provide in the option agreement. The exercise price of such options generally will be not less than 100% of the fair market value per share of the Common Shares at the date of the grant. In the case of ISOs, certain limitations apply with respect to the aggregate value of option shares which can become exercisable for the first time during any one calendar year, and certain additional limitations apply to “Ten Percent Shareholders” (as defined in the 2011 Plan). The Compensation Committee may provide for the payment of the exercise price in cash, by delivery of other Common Shares having a fair market value equal to such option exercise price, by a combination thereof or by any method in accordance with the terms of the option agreements. The exercise price for each outstanding option to purchase one Common Share granted under the 2011 Plan is subject to reduction by the per share amount of any dividend that we declare from time to time while the option is outstanding. The 2011 Plan contains special rules governing the period during which options may be exercised in the case of death, disability, or other termination of employment. Options are not transferable except by will or pursuant to applicable laws of descent and distribution upon death of an employee, unless otherwise approved by our Board of Directors.
The 2011 Plan also provides for the granting of restricted share awards, which are awards of Common Shares that may not be disposed of, except by will or the laws of descent and distribution, for such period as the Compensation Committee determines (which we refer to as the restricted period). The Compensation Committee may also impose such other conditions and restrictions on the shares as it deems appropriate, including the satisfaction of performance criteria. The Compensation Committee may provide that such restrictions will lapse with respect to specified percentages of the awarded shares on successive anniversaries of the date of the award. During the restricted period, the grantee is entitled to receive dividends with respect to, and to vote the shares awarded to him or her. If, during the restricted period, the grantee’s continuous employment with the Company terminates for any reason, any shares remaining subject to restrictions will be forfeited. The Compensation Committee has the authority to cancel any or all outstanding restrictions prior to the end of the restricted period, including cancellation of restrictions in connection with certain types of termination of employment.
The 2011 Plan furthermore provides for the granting of restricted share units, which are awards that are settled by the issuance of a number of Common Shares. The grantee has no rights with respect to such Common Shares until they are actually issued to the grantee. The Compensation Committee may also grant other share-based awards under the 2011 Plan, such as share appreciation rights.
In February 2016, our Board of Directors approved the reservation of an additional 4,000,000 Common Shares for issuance under the 2011 Plan. As of December 31, 2016, 2,137,783 Common Shares were issuable upon the exercise of outstanding options under the 2011 Plan, at a weighted average exercise price of $6.91 per share, of which options to purchase 1,172,950 Common Shares had vested. 818,932 of such Common Shares were issuable upon the exercise of outstanding options held by our directors and executive officers. As of December 31, 2016, 3,900,284 Common Shares were available for future grant under the 2011 Plan.
Restricted Share and Option Grants Outside of Our Stock Option and Incentive Plans
During 2016, an additional 29,500 of the 88,500 restricted shares of Sapiens Decision, the Company's majority-owned subsidiary that were granted to one of the former shareholders of KPI in 2014 (as described in note 1d(3) to our consolidated financial statements included in this annual report) vested (in addition to the 29,500 of such 88,500 restricted shares that had vested in 2015), thereby reducing the Company’s percentage ownership of Sapiens Decision from 95.7% to 94.25%. During 2016, Sapiens Decision issued options to certain of its employees to purchase shares of Sapiens Decision.
Members of our Board of Directors are elected by a vote at the annual general meeting of shareholders and serve for a term of one year, until the following year’s annual meeting. Directors may serve multiple terms and are elected by a majority of the votes cast at the meeting. The Chief Executive Officer serves until his removal by the Board of Directors or resignation from office. Our non-employee directors do not have agreements with the Company for benefits upon termination of their service as directors.
The Audit Committee of our Board of Directors is comprised of three independent directors (such independence determination having been made by our Board of Directors, in accordance with the NASDAQ Listing Rules), who were nominated by the Board of Directors: Yacov Elinav, Uzi Netanel and Eyal Ben Chlouche. Mr. Elinav serves as the chairman of the committee. The Board of Directors has determined that Mr. Elinav meets the definition of an audit committee financial expert (as defined in paragraph (b) of Item 16A of Form 20-F promulgated by the SEC). The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing financial information, internal controls and the audit process. In addition, the Committee is responsible for oversight of the work of our independent auditors. The Committee meets at regularly scheduled quarterly meetings.
The Compensation Committee of our Board of Directors is comprised of three directors, nominated by the Board of Directors: Uzi Netanel, Naamit Salomon and Guy Bernstein. Mr. Bernstein serves as the chairman of the committee. The Compensation Committee is responsible for the review and approval of grants of options to our employees and other compensation matters as requested by the Board of Directors from time to time.
NASDAQ Opt-Outs for a Foreign Private Issuer
We are a foreign private issuer within the meaning of NASDAQ Listing Rule 5005(a)(18), since we are governed by the laws of Curaçao and we meet the other criteria set forth for a “foreign private issuer” under Rule 3b-4(c) under the Exchange Act.
Pursuant to NASDAQ Listing Rule 5615(a)(3), a foreign private issuer may follow home country practice in lieu of certain provisions of the NASDAQ Listing Rule 5600 series and certain other NASDAQ Listing Rules. Please see “Item 16G. Corporate Governance” below for a description of the manner in which we rely upon home country practice in lieu of certain of the NASDAQ Listing Rules.
As of December 31, 2016, we had a total of 1,928 employees, a 22.6% increase relative to the end of 2015.
The following table sets forth the number of our employees as of the end of each of the past three fiscal years, according to their geographic regions:
|Geographic Region||Total Number of Employees as of December 31,|
|UK and Europe||212||367||445|
The number of our Common Shares beneficially owned by our directors and executive officers individually, and by our directors and executive officers as a group, as of March 1, 2017, is as follows:
|Shares Beneficially Owned|
|Roni Al Dor||1,124,781||(2)||2.3||%|
|All directors and executive officers as a group (7 persons, including Roni Al-Dor)(3) (4)||2,284,950||4.5||%|
|(1)||Unless otherwise indicated below, the persons in the above table have sole voting and investment power with respect to all shares shown as beneficially owned by them. The percentages shown are based on 49,035,951 Common Shares outstanding (which excludes 2,328,296 Common Shares held in treasury) as of March 1, 2017, plus such number of Common Shares as the relevant person or group had the right to receive upon exercise of options that are exercisable within 60 days of March 1, 2017.|
|(2)||Includes options to purchase 408,932 Common Shares under the 2011 Plan at a weighted average exercise price of $5.87 per share expiring no later than May 2021, which are vested or will become vested within 60 days of March 1, 2017. See Item 6 - “Directors, Senior Management and Employees - Compensation of Directors and Officers.|
|(3)||Each of our directors and executive officers who is not separately identified in the above table beneficially owns less than 1% of our outstanding Common Shares (including options to purchase Common Shares held by each such party that are vested or will vest within 60 days of March 1, 2017) and has therefore not been separately identified.|
|(4)||Includes options to purchase 1,373,783 Common Shares at exercise prices ranging from $2.50 to $9.73 per share, which are vested or will become vested within 60 days of March 1, 2017.|
|Item 7.||Major Shareholders and Related Party Transactions|
The following table sets forth, as of March 1, 2017, certain information with respect to the beneficial ownership of the Company’s Common Shares by each person known by the Company to own beneficially more than 5% of the outstanding Common Shares, based on information provided to us by the holders or disclosed in public filings of the shareholders with the Securities and Exchange Commission.
We determine beneficial ownership of shares under the rules of Form 20-F promulgated by the SEC and include any Common Shares over which a person possesses sole or shared voting or investment power, or the right to receive the economic benefit of ownership, or for which a person has the right to acquire any such beneficial ownership at any time within 60 days.
|Shares Beneficially Owned|
|Name and Address||Number||Percent (1)|
|Formula Systems (1985) Ltd. |
5 HaPlada Street
Or Yehuda 60218, Israel
To the best of our knowledge, the entity listed in the above table has sole voting and investment power with respect to all shares shown as beneficially owned by it.
|(1)||The percentages shown are based on 49,035,951 Common Shares outstanding (which excludes 2,328,296 Common Shares held in treasury) as of March 1, 2017.|
|(2)||The number of Common Shares shown as owned by Formula is based on information provided to the Company by Formula as of March 1, 2017. Also based on information provided to the Company, Asseco beneficially owned, as of March 1, 2017, 46.3% of the outstanding share capital of Formula. As such, Asseco may be deemed to be the beneficial owner of the aggregate 23,954,094 Common Shares held directly by Formula. The address of Asseco is Olchowa 14 35-322 Rzeszow, Poland.|
Significant changes in holdings of major shareholders
From time to time, Formula has increased its beneficial shareholding in our Company through market purchases of additional Common Shares.
As of May 2013, Formula owned 22,369,035 Common Shares, or 57.2% of all outstanding Common Shares. That ownership was diluted down to 47.7% as of April 1, 2014, primarily as a result of our issuance of 6,497,500 Common Shares pursuant to our public offering in November 2013. From August 21, 2014 through September 16, 2014, Formula purchased an aggregate of 736,862 Common Shares in broker-initiated and private transactions for an aggregate purchase price of $5.8 million, following which Formula owned 23,105,897 Common Shares, or 48.5% of all outstanding Common Shares. From September 17, 2014 through December 26, 2014, Formula purchased an aggregate of 808,940 Common Shares in broker-initiated and private transactions, for an aggregate purchase price of $6.1 million, thereby increasing its beneficial ownership percentage back up to 50.2%. That beneficial ownership has been diluted down once again to 48.9% as of March 1, 2017, primarily as a result of various minor issuances of Common Shares that we have made.
Yelin Lapidot Holdings and its affiliates, which were formerly a 5% shareholder of our company, had acquired 2,209,748 of our Common Shares in October 2013, and then acquired additional shares such that they held 2,625,007 Common Shares as of the end of 2015. They have subsequently sold shares and reduced their holdings to 2,381,426 Common Shares as of December 31, 2016, thereby reducing their ownership of our Common Shares below 5% (based on Amendment No. 4 to the Schedule 13G filed by Yelin Lapidot Provident Funds Management Ltd., Yelin Lapidot Mutual Funds Management Ltd., Yair Lapidot and Dov Yelin on February 8, 2017).
Voting rights of major shareholders
The major shareholders disclosed above do not have different voting rights than other shareholders with respect to the Common Shares that they hold.
Holders of record
As of March 1, 2017 there were 65 holders of record of our Common Shares, including 45 holders of record with addresses in the United States who held a total of 41,372,232 Common Shares (out of which 41,363,233 Common Shares are held of record by CEDE & Co), representing approximately 84.4% of our issued and outstanding Common Shares. The number of record holders in the United States is not representative of the number of beneficial holders, nor is it representative of where such beneficial holders are resident, because many of these Common Shares were held of record by nominees (including CEDE & Co., as nominee for a large number of banks, brokers, institutions and underlying beneficial holders of our Common Shares). In particular, Formula, which held (as of March 1, 2017 (in part as a record holder and in part as an underlying beneficial holder) 23,954,094 Common Shares, representing 48.9% of our issued and outstanding shares, is not a United States company.
Control of the Company
Based on Formula’s beneficial ownership of 48.9% of the outstanding Common Shares of the Company (as of March 1, 2017), and based on Asseco’s beneficial ownership of 46.3% of the outstanding share capital of Formula (also as of that date), both Formula and Asseco may be deemed to control the Company. We are unaware of any arrangements the operation of which may at a subsequent date result in a change of control of the Company.
|B.||Related Party Transactions|
Registration Rights Agreement with Major Shareholders
The description of the Registration Rights Agreement set forth in Item 10.C “Material Contracts” is incorporated by reference herein.
Fees Paid to Major Shareholder for Board Service of its Affiliate
We paid to our major shareholder, Formula, approximately $23,000 in respect of our share of the director fees of Guy Bernstein, our Chairman, for the year ended December 31, 2016. Mr. Bernstein serves as the Chief Executive Officer of Formula and a director of Asseco. Formula directly owns (as of March 1, 2017) approximately 48.9% of our currently outstanding Common Shares.
Additional Agreements and Transactions with Affiliated Companies of Formula
During the year ended December 31, 2016, we paid to affiliated companies of Formula approximately $6.1 million, in the aggregate, pursuant to services agreements that we have in place with those companies under which we receive services. In 2016, we also purchased from those affiliated companies an aggregate of approximately $1.0 million of hardware and software. Please see Note 13 to our audited consolidated financial statements included in Item 18 of this annual report for further information.
Services Obtained from Asseco
During 2016, Asseco provided back-office services, professional services and fixed assets to our wholly-owned subsidiary, Insseco, in an amount totaling approximately $1.9 million. Please see Note 13 to our audited consolidated financial statements included in Item 18 of this annual report for further information.
Trade Payables and Receivables
As of December 31, 2016, we had trade payables balances due to, and trade receivables balances due from, our related parties in amounts of approximately $1.3 million and $1.4 million, respectively.
|C.||Interests of Experts and Counsel.|
|Item 8.||Financial Information|
|A.||Consolidated Statements and Other Financial Information.|
See the Consolidated Financial Statements and related notes in Item 18.
In 2016, 86.5% of our revenues originated from customers located outside of Israel. For information on our revenues breakdown by geographic region for the past three years, see Item 5.A, “Operating and Financial Review and Prospects— Operating Results— Comparison of the years ended December 31, 2015 and 2016, and Comparison of the years ended December 31, 2014 and 2015— Revenues by geographical region”.
Previously, we entered into a software development project agreement with a significant customer to customize, enhance and implement a new product. We have recently received a letter from that customer, in which the customer alleged that we have materially breached our agreement with the customer. After carefully examining the customer’s allegations, we informed the customer that we have not materially breached any of our obligations under the agreement and that the customer itself has materially breached the agreement. Work on the project has been halted due to the dispute. The parties are currently engaged in discussions relating to the foregoing.
In addition to the foregoing, from time to time, we are a party to various non-material legal proceedings and claims that arise in the ordinary course of business.
Upon review of our consolidated results of operations, financial condition, cash requirements, future prospects and other factors, on January 15, 2013, April 20, 2015 and March 31, 2016, our Board of Directors determined, subject to shareholder approval, to declare and pay one-time cash interim dividends of $0.15, $0.15 and $0.20 per Common Share (or $5.8 million, $7.2 million and $10 million, in the aggregate, respectively), which were paid on February 22, 2013 and commencing on June 1, 2015 and June 1, 2016, respectively.
We do not have a dividend policy. However, our Board of Directors will determine, on an annual basis, as to whether we will pay a dividend in the upcoming year. Such determination will be dependent upon our financial condition, recent and prospective results of operations, and cash requirements, among other relevant factors, and will be subject to the requirements of Curaçao law and the Articles. If our company continues to be profitable, our Board of Directors may decide to distribute additional dividends in the future as well. For more information about distribution of dividends, the related requirements of Curaçao law and various tax implications, see Item 10, “Additional Information— Memorandum and Articles of Association;” Item 10, “Additional Information— Exchange Controls,” and Item 10, “Additional Information— Taxation.”
No significant change, other than as otherwise described in this annual report, has occurred in our operations since the date of our consolidated financial statements included in this annual report.
|ITEM 9.||THE OFFER AND LISTING|
|A.||Offer and Listing Details|
The Company’s Common Shares are listed on the NASDAQ Capital Market and on the TASE under the symbol “SPNS”.
The table below sets forth the high and low closing prices (in US dollars) for our Common Shares on the NASDAQ Capital Market (i) on an annual basis for the years 2012 through 2016, and the year 2017 (through March 14, 2017), and (ii) on a quarterly basis for 2015, 2016 and the first quarter of 2017 (through March 14, 2017):
|2017 (through March 14, 2017)||15.45||13.07|
|First Quarter (through March 14, 2017)||15.45||13.07|
The table below sets forth the high and low closing prices (in US dollars) for our Common Shares on the NASDAQ Capital Market on a monthly basis during the most recent six-month period.
|March 2017 (through March 14, 2017)||14.44||13.12|
The closing price of our Common Shares on the NASDAQ Capital Market on March 14, 2017, being the last practicable date prior to publication of this annual report, was $13.12.
Our Common Shares began trading on the TASE effective March 6, 2003. Under current Israeli law, the Company satisfies its reporting obligations in Israel by furnishing to the applicable Israeli regulators those reports that the Company is required to file or submit in the United States. The table below sets forth the high and low closing prices, in US dollars, for our Common Shares on the TASE on an annual basis for the years 2012 through 2016 and the year 2017 (through March 14, 2017), and on a quarterly basis for the years 2015 and 2016, and for the first quarter of 2017 (through March 14, 2017). The conversion from NIS into US dollars for the following two tables is based on the average monthly, quarterly or yearly representative rate of exchange published by the Bank of Israel for the month, quarter or year (as appropriate) in which such high or low closing price per share was recorded.
|2017 (through March 14, 2017)||15.27||12.85|
|First Quarter (through March 14, 2017)||15.27||12.85|
The table below sets forth the high and low closing prices, in US dollars, for our Common Shares on the TASE during the most recent six-month period:
|March 2017 (through March 14, 2017)||14.53||13.05|
The closing price of our Common Shares on the TASE on March 14, 2017, being the last practicable date prior to publication of this annual report, was $13.12 (as converted from NIS based on the closing representative exchange rate as of March 14, 2017).
|B.||Plan of Distribution.|
Our Common Shares are listed on the NASDAQ Capital Market and on the TASE under the symbol “SPNS”.
|F.||Expenses of the Issue.|
|Item 10.||Additional Information|
|B.||Memorandum and Articles of Association.|
1. Registration and Purposes. The Company is organized and existing under the laws of Curaçao. Its registered number is 53368.
The objects and purposes of the Company, which are itemized in Article II of our Amended Articles of Association, may be summarized as follows:
|·||to establish, participate in or have any other interest in business enterprises concerned with the development and commercial operation of software;|
|·||to finance directly or indirectly the activities of the Company, its subsidiaries and affiliates;|
|·||to borrow and to lend moneys;|
|·||to engage in the purchase and sale of securities, futures, real estate, business debts, commodities and intellectual property;|
|·||to undertake, conduct and promote research and development;|
|·||to guarantee, pledge, mortgage or otherwise encumber assets as security for the obligations of the Company or third parties; and|
|·||to do all that may be useful or necessary for the attainment of the above purposes.|
2. Board of Directors. In case of a conflict of interest between the Company and one or more directors, acting either in private or ex officio, the Company shall be represented by a person appointed thereto by the General Meeting of Shareholders or the Board of Directors. A director who knows or ought to understand that in a certain instance there is mention of a conflicting interest between the Company and him acting privately or ex officio, will timely inform the General Meeting of Shareholders or Board of Directors of such conflict of interest. No conflict of interest will be deemed to exist between the Company and one or more of its directors in case of a contract or transaction between the Company and any other corporation, partnership, association, or other organization in which one or more directors are directors or officers, or have a financial interest, solely for that reason, or solely because the director is present or participates in the meeting of the Board of Directors or Committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if : (a) the material facts are disclosed or are known to the Board of Directors, (b) the material facts are disclosed or are known to the shareholders entitled to vote thereon, (c) the contract or transaction is fair as to the Company as of the time it is authorized, approved or ratified by the Board of Directors, a Committee thereof or the shareholders. Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a Committee that authorizes the contract or transaction. The Articles provide that the directors shall receive such compensation as the Board of Directors may from time to time prescribe. Members of the Board of Directors have the power to vote compensation to themselves, even if they lack an independent quorum, subject to prior approval of the range of their compensation by the Company’s General Meeting of Shareholders.
The Articles do not grant borrowing powers to directors; nor do they require directors to resign at a certain age or to purchase a certain number of Common Shares.
3. Rights and Preferences. The Company has only one class of shares of common stock, the Common Shares, currently outstanding. All previous issuances of preferred shares have been converted into Common Shares. The rights and preferences of the holders of Common Shares are summarized below. The Articles authorize a class of undefined preferred shares (which we refer to as the Blank Preferred Shares). There are no rights associated with the Blank Preferred Shares and none have been issued. The Board of Directors shall specify the rights that shall be associated with the Blank Preferred Shares prior to their issuance, including dividend rights and voting rights.
Holders of the Common Shares are entitled to one vote for each whole share on all matters to be voted upon by shareholders, including the election of directors. Holders of the Common Shares do not have cumulative voting rights in the election of directors. All Common Shares are equal to each other with respect to liquidation and dividend rights. Holders of the Common Shares are entitled to receive dividends, subject to shareholder approval, out of funds legally available under Curaçao law. See “Dividend Policy” below. In the event of the liquidation of the Company, all assets available for distribution to the holders of the Common Shares are distributable among them according to their respective holdings, subject to the preferences of any shares having a preference upon liquidation that may be then outstanding. Holders of the Common Shares have no preemptive rights to purchase any additional, unissued Common Shares. The foregoing summary of the Common Shares does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Articles.
We do not have a dividend policy. However, our Board of Directors will determine, on an annual basis, as to whether we will pay a dividend in the upcoming year. Such determination will be dependent upon various financial criteria, among other relevant factors. If our company continues to be profitable, our Board of Directors may decide to distribute a dividend, as it has done in the recent past. Please see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy” above for further information concerning the factors that help to determine whether and under what circumstances we may distribute dividends.
Our ability to pay dividends is subject to the limitations of the Curaçao Civil Code and the Articles. In direct connection with the approval of our annual accounts, the general meeting of our shareholders shall decide on the distribution of the profits. Profits can either be reserved or distributed to the shareholders in accordance with the Articles. Our Board of Directors has the right to reserve the profits at its discretion. If such reservation has been made by our Board of Directors, the general meeting of shareholders is not authorized to make a distribution out of the reserved part of the profits, unless the Board of Directors has first recommended in writing to the general meeting that such distribution out of the reserved profits can be made and the general meeting has adopted a resolution to that effect. Our Board of Directors may at any time resolve to make any interim distributions, if justified by the anticipated profits of our company as an advanced payment of the dividend expected to be declared by the general meeting. The Curaçao Civil Code and the Articles further provide that a (interim) distribution of dividends can only occur if, at the moment of distribution, the equity of our company equals at least the nominal capital of our company and, as a result of the distribution, it will not fall below the nominal capital. Nominal capital is the sum of the par values of all of the issued shares of our company’s capital stock at any moment in time.
|(c)||The Blank Preferred Shares|
There are no preferences or any rights whatsoever associated with the Blank Preferred Shares. These shares are unissued and are not owned by any of the current shareholders of the Company. Any issuance of these preferred shares is solely within the discretion of the Company’s Board of Directors. The Company has undertaken toward the TASE that so long as its Common Shares are listed for trading on the TASE, the Company shall not issue or grant any shares of a different class of shares than those that are listed for trading on the TASE. This undertaking does not apply to Preferred Shares as defined in Section 46B(b) of the Israel Securities Law, on the condition that such Preferred Shares are issued in accordance with the conditions set forth in Section 46A(1) therein.
4. Changing the Rights of the Shareholders. The general meeting of shareholders decides upon any change in the Articles. Provided that no Blank Preferred Shares have been issued, a resolution to amend the Articles requires the approval of the absolute majority of all shares outstanding and entitled to vote.
5. General Meetings. At least one general meeting of shareholders must be held each year. Pursuant to the Articles, general meetings must be held in Curaçao. Special general meetings of shareholders may be called at any time by the Chairman of the Board or by the Board of Directors upon no less than 12 nor more than 60 days’ written notice to the Company’s shareholders. Every shareholder has the right to attend any meeting of shareholders in person or by proxy and to address the meeting. No action may be taken at any meeting of shareholders unless a quorum consisting of holders of at least one-half of the shares outstanding and entitled to vote are present at the meeting in person or by proxy. If a quorum is not present at the originally-called shareholder meeting, a second shareholder meeting, is held within two months. At that second meeting, valid resolutions may be adopted with respect to any matter stated in the notice of the original meeting and also in the notice of such second meeting or which by law is required to be brought before the shareholders (subject to certain exceptions), despite the absence of a quorum.
6. Limitations to Own Securities. The Articles contain no limits on the right to own securities.
7. Change of Control. The Articles contain no provisions that would prevent or delay a change of control of the Company.
8. Disclosure of Ownership. The Articles contain no provisions requiring a shareholder to disclose his or her interest at a certain time; however, holders of our shares are subject to the reporting provisions of the SEC.
We are not party to any material contract within the two years prior to the date of this annual report, other than contracts entered into in the ordinary course of business, or as otherwise described below:
Share Purchase Agreement for Acquisition of StoneRiver
In the first quarter of 2017, our company entered into a share purchase agreement with StoneRiver Group L.P., or the Seller, and StoneRiver, Inc., or StoneRiver, for the acquisition of all of the issued and outstanding share capital of StoneRiver. We consummated the acquisition later in the first quarter of 2017. StoneRiver is a Denver, Colorado- based provider of technology solutions and services to the insurance industry.
The acquisition consideration is approximately $100 million in cash, subject to certain adjustments based on working capital, transaction expenses, unpaid debt and certain litigation matters.
Immediately prior to closing, we purchased a representations and warranties insurance policy covering certain indemnifiable damages under the agreement, which we refer to as the Insurance. The Insurance provides for coverage of $12,500,000 in the aggregate and its term is in general three years (except with respect to certain fundamental representations and warranties, as to which the term of the Insurance is six years). In addition, two escrow funds were established by StoneRiver, for the purpose of enabling the indemnification of our company for certain damages that are not fully recovered under the Insurance: (i) an escrow fund in the amount of $500,000 for a period of one year and (ii) an escrow fund in the amount of $2,000,000 for a period of 18 months.
HSBC Term Loan Credit Agreement
In the first quarter of 2017, we (via our wholly-owned subsidiary, Sapiens Americas Corporation, or the Borrower) entered into a secured credit agreement, or the Credit Agreement, with HSBC Bank USA, National Association, or the Lender, in connection with, and as financing for, our acquisition of StoneRiver. Pursuant to the Credit Agreement, our company borrowed $40 million, or the Bank Loan, for a five-year term. The Bank Loan will mature in March 2022 and is payable in equal consecutive quarterly principal installments of principal and accrued interest. The Borrower is entitled to prepay the Bank Loan at any time (on any interest payment date) without penalty upon notice to the Lender. The Bank Loan bears interest at the rate of LIBOR plus 1.85%.
The repayment of the Bank Loan is secured by first priority liens over (i) substantially all assets of the Borrower and its US subsidiaries and (ii) the shares of the Borrower held by Sapiens International Corporation B.V. Certain affiliated entities of the Borrower have guaranteed the repayment of the Bank Loan. The Credit Agreement contains customary representations and warranties, affirmative covenants and negative covenants, which include, without limitation, restrictions on indebtedness, liens, investments, and certain dispositions with respect to the property secured by the lien. The Credit Agreement also contains customary events of default that entitle the Lender to cause any or all of our company's indebtedness to become immediately due and payable and to foreclose on the lien, and includes customary grace periods before certain events are deemed events of default.
Share Purchase Agreement for Acquisition of Insseco
In the third quarter of 2015, our company (via our wholly-owned subsidiary, Sapiens Technologies (1982) Ltd.) entered into a share purchase agreement with Asseco for the acquisition of all of the issued and outstanding shares of Insseco. We consummated the acquisition later in the third quarter of 2015. Insseco is a newly established company into which Asseco had transferred all of its Polish insurance employees, certain fixed assets, certain customer contracts and certain software, including intellectual property rights. Insseco has a team of approximately 140 insurance professionals and an established presence in the Polish insurance market, and services major insurance customers in Poland, including top tier insurance carriers.
Pursuant to the agreement, we paid the acquisition consideration in cash, consisting of 34.3 million Polish Zloty, or approximately $9.1 million. In addition, Asseco may be entitled to upside or downside performance-based payments relating to achievements of revenue goals and profitability over the next five years. If the aggregate revenues generated by Insseco from its activity from July 1, 2015 through June 30, 2020 exceed 90.0 million Polish Zloty, or approximately $23.8 million, Asseco will be entitled to receive additional amounts ranging from 3% to 15% of the excess amount of the respective revenues. If the aggregate revenues generated by Insseco for the period from July 1, 2015 through June 30, 2018 are below 84.0 million Polish Zloty or $22.2 million, Asseco will pay us an amount equal to 35% of the deficiency below such amount. In addition, the amounts payable to Asseco may be adjusted upwards or downwards as a result of changes in the profitability of a specific account that we acquired as part of the acquisition.
The estimated fair value of the contingent payments that depend on the revenue and profitability goals pursuant to the share purchase agreement was $1.0 million as of December 31, 2016.
Registration Rights Agreement
In connection with our acquisitions of each of IDIT and FIS, which were consummated in the third quarter of 2011, we granted the shareholders of IDIT (or the IDIT Selling Shareholders), the shareholders of FIS (or the FIS Selling Shareholders, to which we refer, together with the IDIT Selling Shareholders, as the Holders) and Formula certain registration rights under a Registration Rights Agreement. Under the Registration Rights Agreement, the Holders and Formula are entitled to piggyback registration rights in connection with any registration statement that we file (subject to customary exceptions). The Holders also agreed to execute a lock-up agreement if requested by the representative of the underwriters in any underwritten offering. Based on information that we have received from our transfer agent, we do not believe that the IDIT Selling Shareholders and the FIS Selling Shareholders still hold a significant number of Common Shares that are entitled to the foregoing registration rights under the Registration Rights Agreement as of the current time.
Although there are Curaçao laws which may impose foreign exchange controls on the Company and may affect the payment of dividends, interest or other payments to non-resident holders of the Company’s securities, including the Common Shares, the Company has been granted an exemption from such foreign exchange control regulations by the Central Bank of Curaçao. Other jurisdictions in which the Company conducts operations may have various currency or exchange controls. In addition, the Company is subject to the risk of changes in political conditions or economic policies which could result in new or additional currency or exchange controls or other restrictions being imposed on the operations of the Company. As to the Company’s securities, Curaçao law and the Articles impose no limitations on the right of non-resident or foreign owners to hold or vote such securities.
Israeli Taxation Considerations for Our Shareholders
The following is a short summary of the material provisions of the tax environment to which shareholders may be subject. This summary is based on the current provisions of tax law. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts.
The summary does not address all of the tax consequences that may be relevant to all purchasers of our Common Shares in light of each purchaser’s particular circumstances and specific tax treatment. For example, the summary below does not address the tax treatment of residents of Israel and traders in securities who are subject to specific tax regimes. As individual circumstances may differ, holders of our Common Shares should consult their own tax adviser as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of Common Shares. The following is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Each individual should consult his or her own tax or legal adviser.
Tax Consequences Regarding Disposition of Our Common Shares
Israeli law generally imposes a capital gain tax on the sale of capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares of Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Ordinance distinguishes between “Real Capital Gain” and “Inflationary Surplus”. The Inflationary Surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The Real Capital Gain is the excess of the total capital gain over the Inflationary Surplus.
Israeli Resident Shareholders
As of January 1, 2006, the tax rate applicable to Real Capital Gain derived by Israeli individuals from the sale of shares which had been purchased on or after January 1, 2003, whether or not listed on a stock exchange, is 20%, unless such shareholder claims a deduction for interest and linkage differences expenses in connection with the purchase and holding of such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a Substantial Shareholder (i.e., a person who holds, directly or indirectly, alone or together with another person who collaborates with such person on a permanent basis, 10% or more of any of the company’s “means of control” (including, among other things, the right to receive profits of the company, voting rights, the right to receive the company’s liquidation proceeds and the right to appoint a director)) at the time of sale or at any time during the preceding 12-month period, such gain will be taxed at the rate of 25%. Individual shareholders dealing in securities in Israel are taxed at their marginal tax rates applicable to business income (up to 48% in 2016).
Notwithstanding the foregoing, pursuant to the Law for Change in the Tax Burden (Legislative Amendments) (Taxes), 2011, the capital gain tax rate applicable to individuals was raised from 20% to 25% from 2012 and onwards (or from 25% to 30% if the selling individual shareholder is a Substantial Shareholder at any time during the 12-month period preceding the sale and/or claims a deduction for interest and linkage differences expenses in connection with the purchase and holding of such shares). With respect to assets (not shares that are listed on a stock exchange) purchased on or after January 1, 2003, the portion of the gain generated from the date of acquisition until December 31, 2011 will be subject to the previous capital gain tax rates (20% or 25%) and the portion of the gain generated from January 1, 2012 until the date of sale will be subject to the new tax rates (25% or 30%).
Under current Israeli tax legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of shares of an Israeli company is the general corporate tax rate. As described above, the corporate tax rate was 25% in2016, in 2017 the corporate tax rate is 24%, and as of 2018 the corporate tax rate will be 23%.
Non-Israeli Residents Shareholders
Israeli capital gain tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rights to shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the seller’s country of residence provides otherwise. As mentioned above, Real Capital Gain is generally subject to tax at the corporate tax rate (25% in 2016, 24% in 2017 and 23% in 2018 and thereafter) if generated by a company, or at the rate of 25% (for assets other than shares that are listed on stock exchange – 20% for the portion of the gain generated up to December 31, 2011) or 30% (for any asset other than shares that are listed on stock exchange – 25% with respect to the portion of the gain generated up to December 31, 2011), if generated by an individual from the sale of an asset purchased on or after January 1, 2003. Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up to 48% for an individual in 2016).
Notwithstanding the foregoing, shareholders who are non-Israeli residents (individuals and corporations) are generally exempt from Israeli capital gain tax on any gains derived from the sale, exchange or disposition of shares publicly traded on the Tel Aviv Stock Exchange or on a recognized stock exchange outside of Israel, provided, among other things, that (i) such gains are not generated through a permanent establishment that the non-Israeli resident maintains in Israel, (ii) the shares were purchased after being listed on a recognized stock exchange, and (iii) with respect to shares listed on a recognized stock exchange outside of Israel, such shareholders are not subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. However, non-Israeli corporations will not be entitled to the foregoing exemptions if Israeli residents (a) have a controlling interest of more than 25% in such non-Israeli corporation, or (b) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
In addition, a sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, under the U.S.-Israel Tax Treaty, or the U.S-Israel Treaty, the sale, exchange or disposition of shares of an Israeli company by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Treaty) holding the shares as a capital asset is exempt from Israeli capital gain tax unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting rights during any part of the 12-month period preceding such sale, exchange or disposition; (ii) the shareholder, if an individual, has been present in Israel for a period or periods of 183 days or more in the aggregate during the applicable taxable year; or (iii) the capital gain arising from such sale are attributable to a permanent establishment of the shareholder which is maintained in Israel. In each case, the sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Treaty, a U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S-Israel Treaty does not provide such credit against any U.S. state or local taxes.
In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in the form of a merger or otherwise, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non-Israeli resident, and, in the absence of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
Taxes Applicable to Dividends
Israeli Resident Shareholders
Israeli residents who are individuals are generally subject to Israeli income tax for dividends paid on our common shares (other than bonus shares or share dividends) at 25%, or 30% if the recipient of such dividend is a Substantial Shareholder at the time of distribution or at any time during the preceding 12-month period. However, dividends distributed from taxable income accrued during the benefits period of an Approved Enterprise or 20% with respect to Preferred Enterprise, if the dividend is distributed during the tax benefits period under the Investment Law or within 12 years after such period. An average rate will be set in case the dividend is distributed from mixed types of income (regular and Approved/ Preferred income).
Israeli resident corporations are generally exempt from Israeli corporate tax for dividends paid on shares of Israeli resident corporations (like our common shares). However, dividends distributed from taxable income accrued during the benefits period of an Approved Enterprise are subject to withholding tax at the rate of 15%, if the dividend is distributed during the tax benefits period under the Investment Law or within 12 years after such period.
Non-Israeli Resident Shareholders
Non-Israeli residents (whether individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on ordinary shares, like our common shares, at the rate of 25% or 30% (if the dividend recipient is a Substantial Shareholder at the time of distribution or at any time during the preceding 12-month period) or 15% if the dividend is distributed from income attributed to our Approved Enterprise or 20% with respect to Preferred Enterprise. Such dividends are generally subject to Israeli withholding tax at a rate of 25% so long as the shares are registered with a Nominee Company (whether the recipient is a Substantial Shareholder or not), and 15% if the dividend is distributed from income attributed to an Approved Enterprise or 20% if the dividend is distributed from income attributed to a Preferred Enterprise, unless a reduced rate is provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). For example, under the U.S-Israel Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our common shares who is a U.S. resident (for purposes of the U.S.-Israel Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by our Approved Enterprise, that are paid to a U.S. corporation holding at least 10% or more of our outstanding voting capital from the start of the tax year preceding the distribution of the dividend through (and including) the distribution of the dividend, is 12.5%, provided that no more than 25% of our gross income for such preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, dividends distributed from income attributed to an Approved Enterprise are subject to a withholding tax rate of 15% for such a U.S. corporation shareholder, provided that the condition related to our gross income for the previous year (as set forth in the previous sentence) is met. If the dividend is attributable partly to income derived from an Approved Enterprise, or a Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for U.S. federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in United States tax legislation.
A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with respect to such income, provided that (i) such income was not generated from business conducted in Israel by the taxpayer, and (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.
Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 2% on annual income exceeding NIS 803,520 for 2016 (and as of 2017, the additional tax will be at a rate of 3% on annual income exceeding NIS 640,000), which amount is linked to the annual change in the Israeli consumer price index, including, but not limited to, dividends, interest and capital gain.
Taxation of Investments
The following discussion is a summary of certain anticipated tax consequences of an investment in the Common Shares under Curaçao tax laws, US federal income tax laws and Israeli laws. The discussion does not deal with all possible tax consequences relating to an investment in the Common Shares. In particular, the discussion does not address the tax consequences under state, local and other (e.g., non-US, non- Curaçao, non-Israel) tax laws. Accordingly, each prospective investor should consult its tax advisor regarding the tax consequences of an investment in the Common Shares. The discussion is based upon laws and relevant interpretations thereof in effect as of the date of this annual report on Form 20-F, all of which are subject to change.
Under the laws of Curaçao as currently in effect, a holder of Common Shares who is not a resident of, and during the taxable year has not engaged in trade or business through a permanent establishment in, Curaçao, should not be subject to Curaçao income tax on dividends paid with respect to the Common Shares or on gains realized during that year on sale or disposal of such shares, unless the holder of Common Shares has been a resident of Curaçao in the preceding ten years and the holder of Common Shares has a qualifying interest of at least 5% of the total issued share capital; Curaçao does not impose a withholding tax on dividends paid by the Company. Under Curaçao law, no gift or inheritance taxes should be levied if, at the time of such gift or at the time of death, the relevant holder of Common Shares was not domiciled in Curaçao.
U.S. Federal Income Tax Considerations
Subject to the limitations described herein, this discussion summarizes certain U.S. federal income tax consequences of the purchase, ownership and disposition of our Common Shares to a U.S. holder. A U.S. holder is a holder of our Common Shares who is:
|·||an individual who is a citizen or resident of the U.S. for U.S. federal income tax purposes;|
|·||a corporation (or another entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any political subdivision thereof, or the District of Columbia;|
|·||an estate, the income of which may be included in gross income for U.S. federal income tax purposes regardless of its source; or|
|·||a trust (i) if, in general, a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (ii) an electing trust that was in existence on August 19, 1996 and was treated as a domestic trust on that date.|
Unless otherwise specifically indicated, this discussion does not consider the U.S. tax consequences to a person that is not a U.S. holder (which we refer to as a non-U.S. holder) and considers only U.S. holders that will own our Common Shares as capital assets (generally, for investment).
This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, or the Code, current and proposed Treasury Regulations promulgated under the Code and administrative and judicial interpretations of the Code, all as currently in effect and all of which are subject to change, possibly with a retroactive effect. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder based on the U.S. holder’s particular circumstances. In particular, this discussion does not address the U.S. federal income tax consequences to U.S. holders who are broker-dealers, insurance companies, real estate investment trusts, regulated investment companies, grantor trusts, individual retirement and tax-deferred accounts, certain former citizens or long-term residents of the U.S., tax-exempt organizations, financial institutions , “financial service entities” or who own, directly, indirectly or constructively, 10% or more of our outstanding voting shares, U.S. holders holding our Common Shares as part of a hedging, straddle or conversion transaction, U.S. holders whose functional currency is not the U.S. dollar, U.S. holders that acquired our Common Shares upon the exercise of employee stock options or otherwise as compensation, and U.S holders who are persons subject to the alternative minimum tax, who may be subject to special rules not discussed below.
Additionally, the tax treatment of persons who are, or hold our Common Shares through a partnership or other pass-through entity is not considered, nor is the possible application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws.
You are advised to consult your tax advisor with respect to the specific U.S. federal, state, local and foreign tax consequences of purchasing, holding or disposing of our Common Shares.
Taxation of Distributions on Common Shares
Subject to the discussion below under “Tax Consequences if We Are a Passive Foreign Investment Company,” a distribution paid by us with respect to our Common Shares to a U.S. holder will be treated as dividend income to the extent that the distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes.
Dividends that are received by U.S. holders that are individuals, estates or trusts generally will be taxed at the rate applicable to long-term capital gains, provided those dividends meet the requirements of “qualified dividend income.” The maximum long-term capital gains rate is 20% for individuals with annual taxable income that exceeds certain thresholds. In addition, under the Patient Protection and Affordable Care Act, higher income taxpayers must pay an additional 3.8 percent tax on net investment income to the extent certain threshold amounts of income are exceeded. See “Tax on Net Investment Income” in this Item below. For this purpose, qualified dividend income generally includes dividends paid by a foreign corporation if certain holding period and other requirements are met and either (a) the stock of the foreign corporation with respect to which the dividends are paid is “readily tradable” on an established securities market in the U.S. (e.g., the NASDAQ Capital Market) or (b) the foreign corporation is eligible for benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. Dividends that fail to meet such requirements and dividends received by corporate U.S. holders are taxed at ordinary income rates. No dividend received by a U.S. holder will be a qualified dividend (i) if the U.S. holder held the Common Share with respect to which the dividend was paid for less than 61 days during the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules of Code Section 246(c), any period during which the U.S. holder has an option to sell, is under a contractual obligation to sell, has made (and not closed) a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such Common Share (or substantially identical securities); or (ii) to the extent that the U.S. holder is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or related to the Common Share with respect to which the dividend is paid. If we were to be a “passive foreign investment company” (as such term is defined in the Code), or PFIC, for any taxable year, dividends paid on our Common Shares in such year or in the following taxable year would not be qualified dividends. See the discussion below regarding our PFIC status under “Tax Consequences if We Are a Passive Foreign Investment Company.” In addition, a non-corporate U.S. holder will be able to take qualified dividend income into account in determining its deductible investment interest (which is generally limited to its net investment income) only if it elects to do so; in such case the dividend income will be taxed at ordinary income rates.
The amount of any distribution which exceeds the amount treated as a dividend will be treated first as a non-taxable return of capital, reducing the U.S. holder’s tax basis in our Common Shares to the extent thereof, and then as capital gain from the deemed disposition of the Common Shares. Corporate holders will not be allowed a deduction for dividends received in respect of the Common Shares.
Distributions of current or accumulated earnings and profits paid in foreign currency to a U.S. holder will be includible in the income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate on the day the distribution is received. A U.S. holder that receives a foreign currency distribution and converts the foreign currency into U.S. dollars subsequent to receipt may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.
Taxation of the Disposition of Common Shares
Subject to the discussion below under “Tax Consequences if We Are a Passive Foreign Investment Company,” upon the sale, exchange or other disposition of our Common Shares, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on the disposition and the U.S. holder’s tax basis in our Common Shares. The gain or loss recognized on the disposition of the Common Shares will be long-term capital gain or loss if the U.S. holder held the Common Shares for more than one year at the time of the disposition and would be eligible for a reduced rate of taxation for certain non-corporate U.S. holders. The maximum long-term capital gains rate is 20% for individuals with annual taxable income that exceeds certain thresholds. In addition, under the Patient Protection and Affordable Care Act, higher income taxpayers must pay an additional 3.8 percent tax on net investment income to the extent certain threshold amounts of income are exceeded. See “Tax on Net Investment Income” in this Item below. Capital gain from the sale, exchange or other disposition of Common Shares held for one year or less is short-term capital gain and taxed as ordinary income. Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of our Common Shares generally will be treated as U.S. source income or loss. The deductibility of capital losses is subject to certain limitations.
A U.S. holder that uses the cash method of accounting calculates the dollar value of the proceeds received on the sale as of the date that the sale settles. However, a U.S. holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the trade date and may therefore realize foreign currency gain or loss. A U.S. holder that uses the accrual method may avoid realizing foreign currency gain or loss by electing to use the settlement date to determine the proceeds of sale for purposes of calculating the foreign currency gain or loss. In addition, a U.S. holder that receives foreign currency upon disposition of its Common Shares and converts the foreign currency into dollars after the settlement date or trade date (whichever date the U.S. holder is required to use to calculate the value of the proceeds of sale) may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the dollar, which will generally be U.S. source ordinary income or loss.
Tax Consequences if We Are a Passive Foreign Investment Company
We would be a passive foreign investment company, or PFIC, for a taxable year if either (1) 75% or more of our gross income in the taxable year is passive income; or (2) the average percentage (by value determined on a quarterly basis) in a taxable year of our assets that produce, or are held for the production of, passive income is at least 50%. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. If we own (directly or indirectly) at least 25% by value of the stock of another corporation, we would be treated for purposes of the foregoing tests as owning our proportionate share of the other corporation’s assets and as directly earning our proportionate share of the other corporation’s income. As discussed below, we believe that we were not a PFIC for 2016.
If we were a PFIC, each U.S. holder would (unless it made one of the elections discussed below on a timely basis) be taxable on gain recognized from the disposition of our Common Shares (including gain deemed recognized if our Common Shares are used as security for a loan) and upon receipt of certain excess distributions (generally, distributions that exceed 125% of the average amount of distributions in respect to such shares received during the preceding three taxable years or, if shorter, during the U.S. holder’s holding period prior to the distribution year) with respect to our Common Shares as if such income had been recognized ratably over the U.S. holder’s holding period for the shares. The U.S. holder’s income for the current taxable year would include (as ordinary income) amounts allocated to the current taxable year and to any taxable year prior to the first day of the first taxable year for which we were a PFIC. Tax would also be computed at the highest ordinary income tax rate in effect for each other taxable year to which income is allocated, and an interest charge on the tax as so computed would also apply. The tax liability with respect to the amount allocated to the taxable year prior to the taxable year of the distribution or disposition cannot be offset by any net operating losses. Additionally, if we were a PFIC, U.S. holders who acquire our Common Shares from decedents (other than nonresident aliens) would be denied the normally-available step-up in basis for such shares to fair market value at the date of death and, instead, would have a tax basis in such shares equal to the lesser of the decedent’s basis or the fair market value of such shares on the decedent’s date of death.
As an alternative to the tax treatment described above, a U.S. holder could elect to treat us as a “qualified electing fund” (a QEF), in which case the U.S. holder would be taxed, for each taxable year that we are a PFIC, on its pro rata share of our ordinary earnings and net capital gain (subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge). Special rules apply if a U.S. holder makes a QEF election after the first taxable year in its holding period in which we are a PFIC. We have agreed to supply U.S. holders with the information needed to report income and gain under a QEF election if we were a PFIC. Amounts includable in income as a result of a QEF election will be determined without regard to our prior year losses or the amount of cash distributions, if any, received from us. A U.S. holder’s basis in its Common Shares will increase by any amount included in income and decrease by any amounts not included in income when distributed because such amounts were previously taxed under the QEF rules. So long as a U.S. holder’s QEF election is in effect with respect to the entire holding period for its Common Shares, any gain or loss realized by such holder on the disposition of its Common Shares held as a capital asset generally will be capital gain or loss. Such capital gain or loss ordinarily would be long-term if such U.S. holder had held such Common Shares for more than one year at the time of the disposition and would be eligible for a reduced rate of taxation for certain non-corporate U.S. holders. The maximum long-term capital gains rate is 20% for individuals with annual taxable income that exceeds certain thresholds. The QEF election is made on a shareholder-by-shareholder basis, applies to all Common Shares held or subsequently acquired by an electing U.S. holder and can be revoked only with the consent of the IRS. The QEF election must be made on or before the U.S. holder's tax return due date, as extended, for the first taxable year to which the election will apply.
As an alternative to making a QEF election, a U.S. holder of PFIC stock that is “marketable stock” (e.g., “regularly traded” on the NASDAQ Capital Market) may, in certain circumstances, avoid certain of the tax consequences generally applicable to holders of stock in a PFIC by electing to mark the stock to market as of the beginning of such U.S. holder’s holding period for our Common Shares. Special rules apply if a U.S. holder makes a mark-to-market election after the first year in its holding period in which we are a PFIC. As a result of such an election, in any taxable year that we are a PFIC, a U.S. holder would generally be required to report gain or loss to the extent of the difference between the fair market value of the Common Shares at the end of the taxable year and such U.S. holder’s tax basis in such shares at that time. Any gain under this computation, and any gain on an actual disposition of our Common Shares in a taxable year in which we are PFIC, would be treated as ordinary income. Any loss under this computation, and any loss on an actual disposition of our Common Shares in a taxable year in which we are PFIC, would be treated as ordinary loss to the extent of the cumulative net-mark-to-market gain previously included. Any remaining loss from marking our Common Shares to market will not be allowed, and any remaining loss from an actual disposition of our Common Shares generally would be capital loss. A U.S. holder’s tax basis in its Common Shares is adjusted annually for any gain or loss recognized under the mark-to-market election. There can be no assurances that there will be sufficient trading volume with respect to our Common Shares for the Common Shares to be considered “regularly traded” or that our Common Shares will continue to trade on the NASDAQ Capital Market. Accordingly, there are no assurances that our Common Shares will be marketable stock for these purposes. As with a QEF election, a mark-to-market election is made on a shareholder-by-shareholder basis, applies to all Common Shares held or subsequently acquired by an electing U.S. holder and can only be revoked with consent of the IRS (except to the extent our Common Shares no longer constitute “marketable stock”).
Based on an analysis of our assets and income, we believe that we were not a PFIC for 2016. We currently expect that we will not be a PFIC in 2017. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant to this determination. Accordingly, there can be no assurance that we will not become a PFIC in any future taxable years. U.S. holders who hold our Common Shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S. holders who made QEF, mark-to-market or certain other special elections. U.S. holders are urged to consult their tax advisors about the PFIC rules, including the consequences to them of making a mark-to-market or QEF election with respect to our Common Shares in the event that we qualify as a PFIC.
Tax on Net Investment Income
A U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from the tax, will be subject to a 3.8% tax on the lesser of (1) the U.S. holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals will be between $125,000 and $250,000, depending on the individual’s circumstances). A U.S. holder’s net investment income generally will include its dividends on our ordinary shares and net gains from dispositions of our ordinary shares, unless those dividends or gains are derived in the ordinary course of the conduct of trade or business (other than trade or business that consists of certain passive or trading activities). Net investment income, however, may be reduced by deductions properly allocable to that income. A U.S. holder that is an individual, estate or trust is urged to consult its tax adviser regarding the applicability of the Medicare tax to its income and gains in respect of its investment in the Common Shares.
Non-U.S. holders of Common Shares
Except as provided below, a non-U.S. holder of our Common Shares will not be subject to U.S. federal income or withholding tax on the receipt of dividends on, or the proceeds from the disposition of, our Common Shares, unless, in the case of U.S. federal income taxes, that item is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States and, in the case of a resident of a country which has an income tax treaty with the United States, such item is attributable to a permanent establishment in the United States or, in the case of an individual, a fixed place of business in the United States. In addition, gain recognized on the disposition of our Common Shares by an individual non-U.S. holder will be subject to tax in the United States if the non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.
Information Reporting and Backup Withholding
A U.S. holder generally is subject to information reporting and may be subject to backup withholding at a rate of up to 28% with respect to dividend payments on, or receipt of the proceeds from the disposition of, our Common Shares. Backup withholding will not apply with respect to payments made to exempt recipients, including corporations and tax-exempt organizations, or if a U.S. holder provides a correct taxpayer identification number, certifies that such holder is not subject to backup withholding or otherwise establishes an exemption. Non-U.S. holders are not subject to information reporting or backup withholding with respect to dividend payments on, or receipt of the proceeds from the disposition of, our Common Shares in the U.S., or by a U.S. payor or U.S. middleman, provided that such non-U.S. holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a holder, or alternatively, the holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules, in either case, provided that the required information is furnished to the IRS.
Information Reporting by Certain U.S. Holders
U.S. citizens and individuals taxable as resident aliens of the United States that own “specified foreign financial assets” with an aggregate value in a taxable year in excess of certain threshold (as determined under Treasury regulations) and that are required to file a U.S. federal income tax return generally will be required to file an information report with respect to those assets with their tax returns. IRS Form 8938 has been issued for that purpose. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, foreign stocks held directly, and interests in foreign estates, foreign pension plans or foreign deferred compensation plans. Under those rules, our ordinary shares, whether owned directly or through a financial institution, estate or pension or deferred compensation plan, would be “specified foreign financial assets”. Under Treasury regulations, the reporting obligation applies to certain U.S. entities that hold, directly or indirectly, specified foreign financial assets. Penalties can apply if there is a failure to satisfy this reporting obligation. A U.S. Holder is urged to consult his tax adviser regarding his reporting obligation.
|F.||Dividends and Paying Agents.|
|G.||Statement by Experts.|
|H.||Documents on Display.|
We are currently subject to the information and periodic reporting requirements of the Exchange Act that are applicable to foreign private issuers. Although as a foreign private issuer we are not required to file periodic information as frequently or as promptly as United States companies, we generally do publicly announce our quarterly and year-end results promptly and file periodic information with the United States Securities and Exchange Commission under cover of Form 6-K. As a foreign private issuer, we are also exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements and our officers, directors and principal shareholders are exempt from the reporting and other provisions in Section 16 of the Exchange Act. Our SEC filings are filed electronically on the EDGAR reporting system and may be obtained through that medium. You may inspect without charge and copy at prescribed rates such filings, including any exhibits and schedules, at the public reference facilities maintained by the SEC, 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of such materials from the SEC at prescribed rates. The SEC also maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of this web site is http://www.sec.gov. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The Exchange Act file number for our Securities and Exchange Commission filings is 000-20181.
Information about Sapiens is also available on our website at http://www.sapiens.com. Such information on our website is not part of this annual report.
|Item 11.||Quantitative and Qualitative Disclosure about Market Risk.|
Market risks relating to our operations result primarily from changes in exchange rates, interest rates or weak economic conditions in the markets in which we sell our products and services. We have been and we are actively monitoring these potential exposures. To manage the volatility relating to these exposures, we may enter into various forward contracts or other hedging instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates and interest rates.
Foreign Currency Risk. We conduct our business in various foreign currencies, primarily those of Israel and the United Kingdom, and to a lesser extent of Japan, Europe and Canada. A devaluation of the NIS, GBP, Euro and the Japanese Yen in relation to the US Dollar has the effect of reducing the US Dollar amount of any of our expenses or liabilities which are payable in those currencies (unless such expenses or payables are linked to the US dollar) while reducing the US Dollar amount of any of our revenues which are payable to us in those currencies.
Because exchange rates between the NIS, GBP, Euro and the Japanese Yen against the US dollar fluctuate continuously, exchange rate fluctuations and especially larger periodic devaluations will have an impact on our revenue and profitability and period-to-period comparisons of our results. The effects of foreign currency re-measurements are reflected as financial expenses in our consolidated financial statements. A hypothetical 10% movement in foreign currency rates (primarily the NIS, GBP, Euro, Japanese Yen, PLN and INR) against the US dollar, with all other variables held constant on the expected sales, would have resulted in a decrease or increase in 2016 sales revenues of approximately $13.6 million.
We monitor our foreign currency exposure and, from time to time, may enter into currency forward contracts or put/call currency options to hedge balance sheet exposure. We may use such contracts to hedge exposure to changes in foreign currency exchange rates associated with balance sheet balances denominated in a foreign currency and anticipated costs to be incurred in a foreign currency.
Market Risk. We currently do not invest in, or otherwise hold, for trading or other purposes, any financial instruments subject to market risk.
Interest Rate Risk. We pay interest on our credit facilities based on the prime interest rate in Israel for some of our NIS-denominated loans. As a result, changes in the general level of interest rates directly affect the amount of interest payable by us under these facilities. However, we expect our exposure to risk from changes in interest rates to be minimal and not material. Therefore, no quantitative tabular disclosures are required.
|Item 12.||Description of Securities Other than Equity Securities.|
|Item 13.||Defaults, Dividend Arrearages and Delinquencies.|
|Item 14.||Material Modifications to the Rights of Security Holders and Use of Proceeds.|
|Item 15.||Controls and Procedures|
|A.||Disclosure Controls and Procedures.|
Our management, including our President and Chief Executive Officer, and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2016. Based on such evaluation, the President and Chief Executive Officer, and the Chief Financial Officer, have concluded that, as of December 31, 2016, the Company’s disclosure controls and procedures are effective.
|B.||Management’s Annual Report on Internal Control Over Financial Reporting.|
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our management, including our President and Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of the end of the period covered by this report.
Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2016. Notwithstanding the foregoing, there can be no assurance that our internal control over financial reporting will detect or uncover all failures of persons within the Company to comply with our internal procedures, as all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements.
|C.||Attestation Report of Registered Public Accounting Firm.|
The attestation report of Kost Forer Gabbay & Kasierer, a member of EY Global, an independent registered public accounting firm in Israel, on our management’s assessment of our internal control over financial reporting as of December 31, 2016 is provided on page F-3, as included under Item 18 of this annual report.
Changes in Internal Control Over Financial Reporting.
Based on the evaluation conducted by our President and Chief Executive Officer and our Chief Financial Officer pursuant to Rules 13a-15(d) and 15d-15(d) under the Exchange Act, our management has concluded that there was no change in our internal control over financial reporting that occurred during the year ended December 31, 2016 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
|Item 16A.||Audit Committee Financial Expert.|
Our Board of Directors has determined that Mr. Yacov Elinav, a member of our Audit Committee, meets the definition of an “audit committee financial expert,” as defined under the applicable rules promulgated by the SEC. All members of our Audit Committee, including Mr. Elinav, are “independent”, as defined under the NASDAQ Listing Rules.
|Item 16B.||Code of Ethics.|
We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer and corporate controller, as well as to our directors and other employees. The Code of Ethics is publicly available on our website at www.sapiens.com. Written copies are available upon request. If we make any substantive amendments to the Code of Ethics or grant any waivers, including any implicit waiver, from a provision of such Code to our principal executive officer, principal financial officer or corporate controller, we will disclose the nature of such amendment or waiver on our website.
|ITEM 16C.||PRINCIPAL ACCOUNTANT FEES AND SERVICES.|
Policies and Procedures
Our Audit Committee has adopted policies and procedures for the pre-approval of audit and non-audit services rendered by our independent auditors, Kost Forer Gabbay & Kasierer, a member of EY Global. The policies generally require the Audit Committee’s pre-approval of the scope of the engagement of our independent auditors or additional work performed on an individual basis. The policy prohibits retention of the independent auditors to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC and also provides that the Audit Committee consider whether proposed services are compatible with the independence of the public auditors.
Fees Paid to Independent Auditors
Fees billed or expected to be billed by Kost Forer Gabbay & Kasierer, a member of EY Global and other members of EY Global for professional services for each of the last two fiscal years were as follows:
|Year ended December 31,|
|(1)||Audit Fees consist of fees billed for the annual audit and the quarterly reviews of the Company’s consolidated financial statements and consist of services that would normally be provided in connection with statutory and regulatory filings or engagements, including services that generally only the independent auditors can reasonably provide.|
|(2)||Tax Fees are for professional services rendered by our auditors for tax compliance, tax advice on actual or contemplated transactions, tax consulting associated with international transfer prices and global mobility.|
|Item 16D.||Exemptions from the Listing Standards for Audit Committees|
|Item 16E.||Purchase of Equity Securities by the Issuer and Affiliated Purchasers|
|ITEM 16F.||CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.|
|ITEM 16G.||CORPORATE GOVERNANCE.|
We are exempt from a number of the requirements under the NASDAQ Listing Rules based on our status as a “foreign private issuer.” See Item 6.C above “Board Practices— NASDAQ Opt-Outs for a Foreign Private Issuer.”
We have elected to follow our home country practice in lieu of the requirements set forth in NASDAQ Listing Rule 5250(d)(1), which require a domestic United States company to make available to its shareholders a copy of its annual report containing its audited financial statements in one of three specific ways. Instead of distributing copies of our annual report by mail, furnishing an annual report in accordance with Rule 14a-16 under the Exchange Act or posting our annual report on our website and undertaking to provide a hard copy thereof free of charge upon request, we simply make our annual report available to shareholders via our website (http://www.sapiens.com/Annual-Reports/).
We have also elected to follow our home country practice in lieu of the requirements of NASDAQ Listing Rules 5605(b), (d) and (e) which require:
• The majority of the company’s board of directors must qualify as independent directors, as defined under NASDAQ Listing Rule 5605(a)(2) and that the independent directors have regularly scheduled meetings at which only independent directors are present.
• The compensation of the chief executive officer and all other executive officers must be determined, or recommended to the board of directors for determination, either by (i) a majority of the independent directors or (ii) a compensation committee comprised solely of independent directors (subject to limited exceptions).
• Director nominees must either be selected or recommended for the board of directors’ selection, either by (a) a majority of independent directors or (b) a nominations committee comprised solely of independent directors (subject to limited exceptions).
• The company must certify that it has adopted a formal written charter or board resolution, as applicable, addressing the nominations process and such related matters as may be required under US federal securities laws.
We have also elected to follow our home country practice in lieu of the requirements set forth in of NASDAQ Listing Rule 5635, which require a domestic United States company to obtain shareholder approval for certain dilutive events, such as:
|·||the establishment or amendment of certain equity based compensation plans and arrangements;|
|·||an issuance that will result in a change of control of the company;|
|·||certain transactions other than a public offering involving issuances of a 20% or more interest in the company; and|
|·||certain acquisitions of the stock or assets of another company.|
We have submitted to NASDAQ a written statement from our independent Curaçao counsel that certified that our practice of not making the annual report available in accordance with NASDAQ rules, but rather making it available on our website, our not complying with the requirements of NASDAQ Listing Rules 5605(b), (d) and (e) and not obtaining the shareholder approvals required under NASDAQ Listing Rule 5635 are not prohibited by Curaçao law.
|ITEM 16H.||MINE SAFETY DISCLOSURE.|
|Item 17.||Financial Statements.|
We have elected to provide financial statements and related information pursuant to Item 18.
|Item 18.||Financial Statements.|
The Consolidated Financial Statements and related notes required by this Item are contained on pages F-1 through F-41 hereof.
SAPIENS INTERNATIONAL CORPORATION N.V.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2016
IN U.S. DOLLARS
|Reports of Independent Registered Public Accounting Firm||F-2 - F-3|
|Consolidated Balance Sheets||F - 4 - F - 5|
|Consolidated Statements of Income||F - 6|
|Consolidated Statements of Comprehensive Income||F - 7|
|Consolidated Statements of Changes in Equity||F - 8|
|Consolidated Statements of Cash Flows||F - 9 - F - 10|
|Notes to the Consolidated Financial Statements||F - 11 - F - 41|
- - - - - - - -
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
To the Board of Directors and Shareholders of
SAPIENS INTERNATIONAL CORPORATION N.V.
We have audited the accompanying consolidated balance sheets of Sapiens International Corporation N.V. ("the Company") as of December 31, 2015 and 2016, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2015 and 2016 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 27, 2017, expressed an unqualified opinion thereon.
|Tel-Aviv, Israel||/s/ KOST FORER GABBAY & KASIERER|
|April 27, 2017||A Member of Ernst & Young Global|
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
SAPIENS INTERNATIONAL CORPORATION N.V.
We have audited Sapiens International Corporation N.V. ("the Company") internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sapiens International Corporation N.V. as of December 31, 2015 and 2016, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2016 and our report dated April 27, 2017 expressed an unqualified opinion thereon.
|Tel-Aviv, Israel||/s/ KOST FORER GABBAY & KASIERER|
|April 27, 2017||A Member of Ernst & Young Global|
|CONSOLIDATED BALANCE SHEETS|
|U.S. dollars in thousands|
|Cash and cash equivalents||$||54,351||$||60,908|
|Trade receivables (net of allowance for doubtful accounts of $ 199 and $ 623 at December 31, 2015 and 2016, respectively)||29,761||34,684|
|Other receivables and prepaid expenses||5,455||6,389|
|Total current assets||98,343||120,201|
|Capitalized software development costs, net||19,856||20,755|
|Other intangible assets, net||7,684||7,599|
|Property and equipment, net||5,675||9,807|
|Other long-term assets||4,252||4,623|
|Severance pay fund||5,551||4,041|
|Total long-term assets||143,928||137,650|
The accompanying notes are an integral part of the consolidated financial statements.
SAPIENS INTERNATIONAL CORPORATION N.V.
|CONSOLIDATED BALANCE SHEETS|
|U.S. dollars in thousands (except share data)|
|LIABILITIES AND EQUITY|
|Employees and payroll accruals||17,119||18,143|
|Accrued expenses and other liabilities||14,893||13,906|
|Deferred revenues and customer advances||10,268||9,137|
|Total current liabilities||47,001||47,748|
|Other long-term liabilities||6,414||9,864|
|Accrued severance pay||6,662||4,940|
|Total long-term liabilities||13,076||14,804|
|COMMITMENTS AND CONTINGENT LIABILITIES|
|REDEEMABLE NON-CONTROLLING INTEREST||385||908|
|Sapiens International Corporation N.V. Shareholders' equity:|
|Common shares of € 0.01 par value: |
Authorized: 70,000,000 shares at December 31, 2015 and 2016, respectively; Issued: 51,088,077 and 51,364,247 shares at December 31, 2015 and 2016, respectively; Outstanding: 48,759,781 and 49,035,951 shares at December 31, 2015 and 2016, respectively
|Additional paid-in capital||233,980||226,782|
|Treasury shares, at cost - 2,328,296 Common shares at December 31, 2015 and 2016||(9,423||)||(9,423||)|
|Accumulated other comprehensive loss||(11,679||)||(11,167||)|
|Total Sapiens International Corporation N.V. shareholders' equity||180,942||193,595|
|Total liabilities and equity||$||242,271||$||257,851|
The accompanying notes are an integral part of the consolidated financial statements.
|CONSOLIDATED STATEMENTS OF INCOME|
|U.S. dollars in thousands (except per share data)|
|Year ended December 31,|
|Cost of revenues||99,095||111,192||130,402|
|Research and development||11,352||10,235||16,488|
|Selling, marketing, general and administrative||32,097||39,859||44,460|